Technology Neutral vs. Technology Specific Procurement

Natalia Fabra and Juan-Pablo Montero,

March 2022

An imperfectly-informed regulator needs to procure multiple units of some good (e.g., green energy, market liquidity, pollution reduction, land conservation) that can be produced with heterogeneous technologies at various costs. How should she optimally procure these units? Should she run technology specific or technology neutral auctions? Should she allow for partial separation across technologies? Should she instead post separate prices for each technology? What are the trade-offs involved? We find that one size does not fit all: the preferred instrument depends on the costs of the available technologies, their degree of substitutability, the extent of information asymmetry, and the costs of public funds. We illustrate the use of our theory for policy analysis with an ex-ante evaluation of Spain’s recent renewable auction.

Keywords: public procurement, auctions, quantity regulation, price regulation, third-degree price discrimination, market power.