Affirmative Action and Dual Sourcing: Towards Supplier Diversity before the Time of Cholera

with J Alcalde

The most recent version is here: SSRN Working Paper No. 3572009 (July 2021).

The current COVID-19 pandemic has highlighted the need to rely on a diverse pool of suppliers, besides achieving cost effectiveness. We propose complementing a share auction for dual sourcing with affirmative action to create an endogenous set-aside for a high-cost supplier. In our model more intensive affirmative action strengthens the targeted provider. This has the potential to level the playing field, inducing more competitive procurement overall. Our main result provides a condition under which the endogenous set-aside not only guarantees a very substantial share for the high-cost supplier, but also reduces the buyer’s provision cost compared to a first-price auction. We also illustrate how our approach can help to reduce the severity and likelihood of health product shortages, such as those that occurred during the recent COVID-19 outbreak.