Supplier Diversity Before the Time of Cholera

Abstract

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