Procurement Design Lessons from Economic Theory and Illustrations from the Dutch Procurement of Welfare-to-Work Projects

This chapter illustrates the main lessons using an example from the Dutch practice, namely procurement of welfare-to-work programs. It summarizes the main lessons and argues that the theory remains silent about many practically important questions. The chapter focuses on auctions and beauty contests. In contrast to lotteries and grandfathering, auctions and beauty contests let several suppliers compete for the project, which forces them to offer high quality for a sharp price. The difference between auctions and beauty contests is that in an auction, the winning supplier is selected on the basis of a well-defined rule, whereas in a beauty contest, the selection decision has at least some degree of subjectivity. The chapter discusses several lessons from economic theory that relate to the design of auctions and beauty contests. Although these lessons can be extremely useful for procurement design in practice, several practically important questions remain unanswered.