Split-award Auctions with Investment∗

This paper studies split-award procurement auctions where a buyer can either divide full production among multiple suppliers or award the entire production to a single supplier. The literature shows that sole sourcing usually dominates multiple sourcing. This paper challenges the “winner-takes-all ” argument. In a framework of generalized second-price auctions with pre-auction investment, we show that split-ting the award improves the suppliers ’ investment incentives, intensifies competition at the bidding stage, and minimizes the buyer’s procurement costs. Finally, in an N-supplier setting, using quadratic investment technology, we illustrate that it is optimal for a buyer to restrict the number of suppliers to two