Online Appendix for

“Multi-Attribute Procurement Auctions in the Presence of

Satisfaction Risk”
Appendix. Proofs.

Proof of Lemma 1. Define the winning probability of the bidder with bid (𝑞, 𝑏) as 𝑃𝑟(𝑤𝑖𝑛|𝑞, 𝑏).

Effort 𝑒(𝜃) does not affect the winning probability but does affect the revenue from uncertain

satisfaction; thus the optimal 𝑒 ∗ (𝜃) depends on 𝑞 ∗ (𝜃). Suppose that there is a unique interior

solution (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) that solves type 𝜃 bidder’s problem 𝑚𝑎𝑥{𝑠(𝑞(𝜃)) − 𝑐(𝑞(𝜃), 𝜃) + 𝛼 ∙

Λ(𝑞(𝜃), 𝑒(𝜃)) − 𝑔(𝑒(𝜃))} . Consider two decision vectors (𝑏̂(𝜃), 𝑞(𝜃), 𝑒(𝜃)) and

(𝑏(𝜃), 𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) , where (𝑞(𝜃), 𝑒(𝜃)) ≠ (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) , 𝑏(𝜃) = 𝑏̂ + 𝑠(𝑞 ∗ ) − 𝑠(𝑞) and

(𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) = 𝑎𝑟𝑔𝑚𝑎𝑥{𝑠(𝑞(𝜃)) − 𝑐(𝑞(𝜃), 𝜃) + 𝛼 ∙ Λ(𝑞(𝜃), 𝑒(𝜃)) − 𝑔(𝑒(𝜃))} . These two

decision pairs have the same winning probability𝑃𝑟(𝑤𝑖𝑛). The expected revenue of the bidder

with (𝑏(𝜃), 𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) is

𝑈𝑠 (𝑏(𝜃), 𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)|𝜃) = [𝑏 − 𝑐(𝑞 ∗ , 𝜃) + 𝛼 ∙ Λ(𝑞 ∗ , 𝑒 ∗ ) − 𝑔(𝑒 ∗ )] ∙ 𝑃𝑟(𝑤𝑖𝑛)

= [𝑏̂ − 𝑐(𝑞, 𝜃) + 𝛼 ∙ Λ(𝑞, 𝑒) − 𝑔(𝑒)] ∙ 𝑃𝑟(𝑤𝑖𝑛)

+ [𝑠(𝑞 ∗ ) − 𝑐(𝑞 ∗ , 𝜃) + 𝛼 ∙ Λ(𝑞 ∗ , 𝑒 ∗ ) − 𝑔(𝑒 ∗ )

− (𝑠(𝑞) − 𝑐(𝑞, 𝜃) + 𝛼 ∙ Λ(𝑞, 𝑒) − 𝑔(𝑒))] ∙ 𝑃𝑟(𝑤𝑖𝑛) > 𝑈𝑠 (𝑏̂(𝜃), 𝑞(𝜃), 𝑒(𝜃)|𝜃)

Since any bid other than (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) generates lower expected revenues, we conclude that

(𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) is the equilibrium, and it must be determined before bid price. Q.E.D.

Proof of Proposition 1. The first-order conditions (FOC) of the supplier’s pseudo-type are as

follows:

1
 𝑠𝑞 (𝑞 ∗ (𝜃)) − 𝑐𝑞 (𝑞 ∗ (𝜃), 𝜃) + 𝛼 · Ʌ𝑞 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) = 0, (A1)

𝛼 · Ʌ𝑒 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) − 𝑔𝑒 (𝑒 ∗ (𝜃)) = 0. (A2)

Ensuring the optimality of the FOC solutions requires verifying that 𝑠(𝑞) − 𝑐(𝑞) is concave.

With the assumption that Ʌ(𝑞, 𝑒) is concave in 𝑞 (Assumption 3 and 4), we can prove that 𝑠(𝑞)

satisfies this requirement in both efficient and optimal mechanisms. The second-order (sufficient)

condition is then given by

(𝑠𝑞𝑞 − 𝑐𝑞𝑞 + 𝛼 · Ʌ𝑞𝑞 )(𝛼 · Ʌ𝑒𝑒 − 𝑔𝑒𝑒 ) > 𝛼 2 · Ʌ2𝑞𝑒 . (A3)

The above inequality implies that successful design of the efficient or optimal mechanism

requires that the second-order cross marginal effect of promised quality and effort not be too

high compared with their second-order marginal effects. Taking the partial derivative with

𝑐𝑞𝜃 (𝑔𝑒𝑒 −𝛼Λ𝑒𝑒 )

respect to 𝜃 for equations (A1) and (A2) yields 𝑞𝜃∗ = (𝑠 2 2
, 𝑒𝜃∗ =
𝑞𝑞 −𝑐𝑞𝑞 +𝛼Λ𝑞𝑞 )(𝑔𝑒𝑒 −𝛼Λ𝑒𝑒 )+𝛼 Λ𝑞𝑒

𝛼Λ𝑞𝑒
𝑞𝜃∗ . Assumptions 1 and 2, and condition (A3) imply that 𝑞𝜃∗ < 0. Whether 𝑒 ∗ increases
𝑔𝑒𝑒 −𝛼Λ𝑒𝑒

or decreases in 𝜃 depends on Λ 𝑞𝑒 due to 𝑔𝑒𝑒 − 𝑥Λ 𝑒𝑒 > 0. Therefore, 𝑒𝜃∗ < 0 when Λ 𝑞𝑒 > 0;

𝑒𝜃∗ > 0 when Λ 𝑞𝑒 < 0. Q.E.D.

Proof of Proposition 2. Note that the optimal promised quality 𝑞 ∗ in bid is determined by the

first-order condition of the bidder’s problem. In the base model, the first-order condition is

𝑠𝑞 (𝑞 ∗ (𝜃)) − 𝑐𝑞 (𝑞 ∗ (𝜃), 𝜃) = −𝛼 ∙ Λ 𝑞 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) . When ∆𝑞𝑞 ≤ 0 (the reference role of

promised quality is dominant), we have Λ 𝑞 (𝑞, 𝑒) ≤ 0; when ∆𝑞𝑞 > 0 (the enhancement role of

promised quality is dominant), we have Λ 𝑞 (𝑞, 𝑒) > 0. Based on the concavity of 𝑠(𝑞(𝜃)) −

𝑐(𝑞(𝜃), 𝜃), a lower promised quality in bid is immediate with dominant reference role compared

to that with dominant enhancement role. Q.E.D.

2
Proof of Lemma 2. We first prove that a unique interior solution of bid price exists for the

supplier’s problem. Let 𝑆0 (𝜃) = max{𝑠(𝑞(𝜃)) − 𝑐(𝑞(𝜃), 𝜃) + 𝛼 ∙ Λ(𝑞(𝜃), 𝑒(𝜃)) − 𝑔(𝑒(𝜃))}

𝑞,𝑒

By envelope theorem, pseudo-type 𝑆0 (𝜃) is strictly decreasing in 𝜃 ; thus its inverse exists.

Define 𝑣 ≡ 𝑆0 (𝜃) with distribution 𝐽(𝑣) = 1 − 𝐹 (𝑆0 −1 (𝑣)) . Moreover, let 𝑏𝑠 denote the

bidding score from supplier i, so 𝑏𝑠 ≡ 𝑠(𝑞 ∗ (𝜃)) − 𝑏. Supplier i’s problem is

𝑛−1
𝑈𝑠 (𝑏, 𝑞, 𝑒|𝜃) = {𝑏 − 𝑐(𝑞, 𝜃) + 𝛼 ∙ Λ(𝑞, 𝑒) − 𝑔(𝑒)} ∙ 𝑃𝑟 (𝑤𝑖𝑛) = (𝑣 − 𝑏𝑠 ) ∙ {𝐽 (𝑏𝑠 −1 (𝑏𝑠 ))} .

Then write 𝑈𝑠 (𝑏, 𝑞, 𝑒|𝜃) as 𝑈𝑠 (𝑏𝑠 (𝑦)|𝑣) = (𝑣 − 𝑏𝑠 (𝑦)) ∙ { 𝐽(𝑦)}𝑛−1 . Given that 𝑏𝑠 (𝑦) is the

equilibrium bidding strategy, supplier i’s optimal choice must be 𝑦 = 𝑣 (i.e., FOC

∂𝑈(𝑏𝑠 (𝑦)|𝑣)⁄𝜕𝑦 = 0 must be satisfied at 𝑦 = 𝑣 ). Following the analysis of Riley and

Samuelson (1981), we can show that the second-order condition holds; the global maximum

exists and is given by the FOC with respect to 𝑣. Noting that 𝑣 maps 𝜃 for each bidder, the FOC

with respect to 𝜃 yields the same global maximum (equilibrium bid price). The existence of a

unique bid price 𝑏 has been proved.

By changing variables, the supplier’s problem becomes 𝑈𝑠 (𝑦, 𝜃) = 𝑣(𝜃) ∙ [1 − 𝐹(𝑦)]𝑛−1 −

𝑝𝑠 (𝑦), where 𝑝𝑠 (𝑦) = 𝑏𝑠 (𝑦)[1 − 𝐹(𝑦)]𝑛−1 is the expected payment by the buyer. Following the

analysis of Riley and Samuelson (1981), we obtain

𝑛−1 𝜃
𝑛−1
𝑝𝑠 ∗ (𝜃) = 𝑣(𝜃̅) ∙ (1 − 𝐹(𝜃̅)) + ∫ 𝑣(𝑡)𝑑(1 − 𝐹(𝑡))
̅
𝜃

𝑛−1 𝜃 𝑛−1
= 𝑣(𝜃) ∙ (1 − 𝐹(𝜃)) − ∫𝜃̅ (1 − 𝐹(𝑡)) 𝑑(𝑣(𝑡)).

Note that 𝑣(𝜃) = 𝑠(𝑞 ∗ (𝜃)) − 𝑐(𝑞 ∗ (𝜃), 𝜃) + 𝛼 ∙ Λ(𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) − 𝑔(𝑒 ∗ (𝜃)) , the envelope

theorem yields 𝑑𝑣(𝜃)⁄𝑑𝜃 = 𝜕𝑣(𝜃)⁄𝜕𝜃 = −𝑐𝜃 (𝑞 ∗ (𝜃), 𝜃). Then we derive,

3
 𝑝𝑠 ∗ (𝜃) = [𝑠(𝑞 ∗ (𝜃)) − 𝑐(𝑞 ∗ (𝜃), 𝜃) + 𝛼 ∙ Λ(𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) − 𝑔(𝑒 ∗ (𝜃))] ∙ [1 − 𝐹(𝜃)]𝑛−1

̅
𝜃 𝑛−1
− ∫𝜃 𝑐𝜃 (𝑞 ∗ (𝑡), 𝑡)(1 − 𝐹(𝑡)) 𝑑𝑡.

Recall that 𝑝𝑠∗ (𝜃) = 𝑏𝑠∗ (𝜃) ∙ [1 − 𝐹(𝜃)]𝑛−1 and 𝑏𝑠∗ (𝜃) ≡ 𝑠(𝑞 ∗ (𝜃)) − 𝑏 ∗ (𝜃). It follows that bid

price is

̅
𝜃 1−𝐹(𝑡) 𝑛−1
𝑏 ∗ (𝜃) = 𝑐(𝑞 ∗ (𝜃), 𝜃) − 𝛼 ∙ Λ(𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) + 𝑔(𝑒 ∗ (𝜃)) + ∫𝜃 𝑐𝜃 (𝑞 ∗ (𝑡), 𝑡) ∙ (1−𝐹(𝜃)) 𝑑𝑡.

Q.E.D.

Proof of Corollary 1. By the optimal bid price in Lemma 2, examining 𝑐𝜃 (𝑞 ∗ (𝑡), 𝑡) is sufficient

to compare the information rent under dominant reference role of promised quality with that

under dominant enhancement role for any 𝜃. Thus, according to the assumptions 𝑐𝜃 > 0, 𝑐𝑞𝜃 >

0 and Proposition 2, Corollary 1 is immediate. Q.E.D.

Proof of Proposition 3. By Lemma 1, bidders choose the optimal pair (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) to

maximize 𝑠(𝑞(𝜃)) − 𝑐(𝑞(𝜃), 𝜃) + 𝛼 ∙ Λ(𝑞(𝜃), 𝑒(𝜃)) − 𝑔(𝑒(𝜃)) for the given scoring rule 𝑠(𝑞)

and the risk allocation 𝛼. With 𝛼 = 1 and 𝑠(𝑞) = 𝑉(𝑞), the aforementioned objective function

reflects the expected social welfare 𝑊(𝑞, 𝑒) = 𝑉(𝑞) − 𝑐(𝑞) + Λ(𝑞, 𝑒) − 𝑔(𝑒) , and the

conclusion is immediate. Q.E.D.

Proof of Lemma 3. We apply a similar analysis as in Milgrom (1989). Consider an optimal

scoring scheme M. Under M, the bidder’s maximum expected revenue is

𝑈𝑠 ∗ (𝑏 ∗ (𝜃), 𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)|𝜃, 𝑀)

= {𝑏 ∗ (𝜃) − 𝑐(𝑞 ∗ (𝜃), 𝜃) + 𝛼 ∙ Λ(𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) − 𝑔(𝑒 ∗ (𝜃))} ∙ 𝑃𝑟(𝑤𝑖𝑛|𝑞 ∗ (𝜃), 𝑏 ∗ (𝜃), 𝑀)

Applying the envelope theorem, 𝑈𝑠 ∗′ (𝜃) = −𝑐𝜃 (𝑞 ∗ (𝜃), 𝜃)𝑃𝑟(𝑤𝑖𝑛|𝑞 ∗ (𝜃), 𝑏 ∗ (𝜃), 𝑀). It follows

̅
𝜃
that 𝑈𝑠 ∗ (𝑏 ∗ (𝜃), 𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)|𝜃, 𝑀) = ∫𝜃 𝑐𝜃 (𝑞 ∗ (𝑡), 𝑡)[1 − 𝐹(𝑡)]𝑛−1 𝑑𝑡. Then, we obtain,

4
 ̅
𝜃 ̅
𝜃
𝑛𝐸𝑈𝑠 ∗ = ∫𝜃 ∫𝜃 𝑐𝜃 (𝑞 ∗ (𝑡), 𝑡)[1 − 𝐹(𝑡)]𝑛−1 𝑓(𝜃)𝑑𝑡𝑑𝜃 = 𝐸𝜃(1) {𝑐𝜃 (𝑞(𝜃(1) ), 𝜃(1) )𝐹(𝜃(1) )/𝑓(𝜃(1) )}.

Subtracting the total information rent from the expected social surplus, we obtain the buyer’s

expected revenue under M, 𝐸[𝑈𝑏 ] = 𝐸𝜃(1) {𝑊 (𝑞(𝜃(1) ), 𝑒(𝜃(1) )) − 𝑐𝜃 (𝑞(𝜃(1) ), 𝜃(1) )𝐹(𝜃(1) )/

𝑓(𝜃(1) )}. Q.E.D.

Proof of Proposition 4. When 𝛼 = 1 and 𝑠(𝑞) = 𝑉(𝑞) − 𝐷(𝑞), the first-order conditions for the

bidder of type 𝜃 are 𝑊𝑞 − 𝑐𝑞𝜃 (𝑞, 𝑞0 −1 (𝑞))[𝐹(𝑞0 −1 (𝑞))⁄𝑓(𝑞0 −1 (𝑞))] = 0 and

Λ 𝑒 (𝑞(𝜃), 𝑒(𝜃)) − 𝑔𝑒 = 0. Meanwhile, the first-order conditions for the buyer’s maximization

problem are 𝑊𝑞 − 𝑐𝑞𝜃 (𝑞, 𝜃)[𝐹(𝜃)/𝑓(𝜃)] = 0 and Λ 𝑒 (𝑞(𝜃), 𝑒(𝜃)) − g 𝑒 = 0 . Only when 𝑞 =

𝑞0 (𝜃) and 𝑒 = 𝑒0 (𝜃), the first order conditions hold for both the bidder and the buyer. Derive the

Hessian of the bidder’s problem,

𝑊𝑞𝑞 − 𝐷𝑞𝑞 Λ 𝑞𝑒 𝑞
[ ], where 𝐷 = ∫𝑙 𝑐𝑞𝜃 (𝑠, 𝑞0 −1 (𝑠)) ∙ [𝐹(𝑞0 −1 (𝑠))/𝑓(𝑞0 −1 (𝑠))]𝑑𝑠.
Λ 𝑞𝑒 Λ 𝑒𝑒 − g 𝑒𝑒

Furthermore, assume 𝑐𝑞𝜃 (𝑞(𝜃), 𝜃) ∙ 𝐹(𝜃)/𝑓(𝜃) is increasing in 𝜃 (the same as in Che (1993)).

Then,

𝐹 1 𝐹
𝑊𝑞𝑞 − 𝐷𝑞𝑞 = 𝑉𝑞𝑞 − 𝑐𝑞𝑞 + Λ 𝑞𝑞 − 𝑐𝑞𝑞𝜃 − ′ ∙ 𝜕 ( 𝑐𝑞𝜃 )⁄𝜕𝜃
𝑓 𝑞0 𝑓

𝐹 𝑐𝑞𝜃 1 𝐹 Λ2𝑒𝑞
= (𝑉𝑞𝑞 − 𝑐𝑞𝑞 + Λ 𝑞𝑞 − 𝑓 𝑐𝑞𝑞𝜃 ) ( 𝐹 )+ 𝐹 ∙ 𝜕 𝑓 𝑐𝑞𝜃 ⁄𝜕𝜃 ∙ Λ ,
𝑐𝑞𝜃 +𝜕 𝑐𝑞𝜃 ⁄𝜕𝜃 𝑐𝑞𝜃 +𝜕 𝑐𝑞𝜃 ⁄𝜕𝜃 𝑒𝑒 −g𝑒𝑒
𝑓 𝑓

where 𝑞0′ has been derived in the proof of Proposition 1. With 𝑉𝑞𝑞 < 0, 𝑐𝑞𝑞 > 0, 𝑐𝑞𝑞𝜃 > 0,

𝑐𝑞𝜃 > 0, and by Assumption 3 Λ 𝑞𝑞 < 0 , Λ 𝑒𝑒 < 0 , it follows that 𝑊𝑞𝑞 − 𝐷𝑞𝑞 < 0 . Further,

condition (A3) guarantees that FOC generates the solution (𝑞0 (𝜃), 𝑒0 (𝜃)). Q.E.D.

Proof of Proposition 5. Note that 𝑈𝑏 (𝑞0 (𝜃), 𝑒0 (𝜃)) is strictly decreasing in 𝜃 , which is

commonly called as “regularity” in mechanism design. With this monotonicity, define a cut-off

5
type value 𝜃̃ for the purpose of ensuring buyer’s non-negative profit. If 𝑈𝑏 (𝑞0 (𝜃), 𝑒0 (𝜃)) ≥ 0

for all 𝜃, the buyer sets 𝜃̃ = 𝜃̅ to allow all types to participate. If 𝑈𝑏 (𝑞0 (𝜃), 𝑒0 (𝜃)) < 0 for all 𝜃,

the buyer obtains negative profit even with best type winner, thus set 𝜃̃ = 𝜃. Otherwise, by

setting the largest solution to 𝑈𝑏 (𝑞0 (𝜃̃ ), 𝑒0 (𝜃̃)) = 0 as 𝜃̃, the buyer gains positive profit from

𝜃 ≤ 𝜃̃ , but rejects all types 𝜃 > 𝜃̃ . Under 𝑠(𝑞) = 𝑉(𝑞) − 𝐷(𝑞) and 𝛼 = 1, we verify that 𝑆̃

excludes types 𝜃 > 𝜃̃. We can prove that any type chooses (𝑞0 (𝜃), 𝑒0 (𝜃)) under 𝑆̃. For analysis

convenience, let pseudo-type be value (in first-price selling auction); let score be price. In this

way, reserve score 𝑆̃ is equivalent to reserve price. Now, derive the bidding strategy (score) for

any bidder with 𝜃 ≤ 𝜃̃ as follows (𝑌1 is the highest value among other n-1 bidders)

𝜃 𝑛−1
1 − 𝐹(𝑡)
𝑆(𝜃) = 𝐸(max{𝑌1 , 𝑆̃}|𝑌1 < 𝑣) = 𝑣 + ∫ 𝑐𝜃 (𝑞0 (𝑡), 𝑡) ∙ ( ) 𝑑𝑡
̃
𝜃 1 − 𝐹(𝜃)

𝜃 1−𝐹(𝑡) 𝑛−1
= 𝑠(𝑞0 (𝜃)) − 𝑐(𝑞0 (𝜃), 𝜃) + Λ(𝑞0 (𝜃), 𝑒0 (𝜃)) − 𝑔(𝑒0 (𝜃)) + ∫𝜃̃ 𝑐𝜃 (𝑞0 (𝑡), 𝑡) ∙ (1−𝐹(𝜃)) 𝑑𝑡.

And the bid price for 𝜃 ≤ 𝜃̃ is

̃
𝜃 1−𝐹(𝑡) 𝑛−1
𝑏𝑠 (𝜃) = 𝑐(𝑞0 (𝜃), 𝜃) − Λ(𝑞0 (𝜃), 𝑒0 (𝜃)) + 𝑔(𝑒0 (𝜃)) + ∫𝜃 𝑐𝜃 (𝑞0 (𝑡), 𝑡) ∙ (1−𝐹(𝜃)) 𝑑𝑡.

Types 𝜃 > 𝜃̃ still maximize pseudo-type. Suppose they participate, bid price is 𝑏𝑠 (𝜃) ≤

𝑠(𝑞0 (𝜃)) − 𝑆̃ which generates negative profits. Therefore, types 𝜃 > 𝜃̃ has been excluded by 𝑆̃.

Q.E.D.

Proof of Corollary 2. Recall the order of the promised quality in bids under dominant reference

role and under dominant enhancement role (from Proposition 2), the result of Corollary 2 follows

from two facts: (1) In the quality distortion 𝐷(𝑞), 𝑐𝑞𝜃 (𝑞(𝜃), 𝜃)𝐹(𝜃)/𝑓(𝜃) is increasing in 𝜃,

which is regarded as regularity condition. It follows that 𝐷(𝑞) increases in 𝑞0−1 (𝑞) (which is

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equivalent to 𝐷(𝑞) increasing in 𝜃). (2) The optimal promised quality in bid 𝑞0 (𝜃) decreases

in 𝜃 (Proposition 1). Q.E.D.

Proof of Proposition 6. Comparing 𝑞 ∗ and 𝑞̂ by applying the Taylor theorem, we have

𝑊(𝑞 ∗ , 𝑒 ∗ ) − 𝐷(𝑞 ∗ ) = 𝑊(𝑞̂, 𝑒̂ ) − 𝐷(𝑞̂)

+((𝑞 ∗ − 𝑞̂) (𝑒 ∗ − 𝑒̂ )) ∙ (𝑊𝑞 (𝑞̂, 𝑒̂ ) − 𝐷𝑞 (𝑞̂) 𝑊𝑒 (𝑞̂, 𝑒̂ ) − 𝐷𝑒 (𝑞̂) )𝑇

1
+ 2 ((𝑞 ∗ − 𝑞̂) (𝑒 ∗ − 𝑒̂ )) ∙ 𝐻(𝜉𝑞 , 𝜉𝑒 ) ∙ ((𝑞 ∗ − 𝑞̂) (𝑒 ∗ − 𝑒̂ ))𝑇 ,

where 𝐻(𝜉𝑞 , 𝜉𝑒 ) is the Hessian matrix of 𝑊(𝑞, 𝑒) − 𝐷(𝑞) at point (𝜉𝑞 , 𝜉𝑒 ), which is on the line

segment joining (𝑞 ∗ , 𝑒 ∗ ) and ( 𝑞̂, 𝑒̂ ). Notice that 𝑊𝑞 (𝑞̂, 𝑒̂ ) = 0 and 𝑊𝑒 (𝑞̂, 𝑒̂ ) − 𝐷𝑒 (𝑞̂) = 0, thus

1
𝑊(𝑞 ∗ , 𝑒 ∗ ) − 𝐷(𝑞 ∗ ) − (𝑊(𝑞̂, 𝑒̂ ) − 𝐷(𝑞̂)) = (𝑞̂ − 𝑞 ∗ )𝐷𝑞 (𝑞̂) + 2 ((𝑞 ∗ − 𝑞̂) (𝑒 ∗ − 𝑒̂ )) ∙

𝐻(𝜉𝑞 , 𝜉𝑒 ) ∙ ((𝑞 ∗ − 𝑞̂) (𝑒 ∗ − 𝑒̂ ))𝑇 .

Note that (𝑞 ∗ , 𝑒 ∗ ) maximizes 𝑊(𝑞, 𝑒) − 𝐷(𝑞), the LHS of the above equality is positive. The

negative definite matrix 𝐻(𝜉𝑞 , 𝜉𝑒 ) ensures that the second term in the RHS is negative; the fact

that 𝐷(𝑞̂) is increasing in 𝑞 (i.e., 𝐷𝑞 (𝑞̂) > 0) leads to the conclusion 𝑞̂ > 𝑞 ∗ .

Now compare 𝑒 ∗ with 𝑒̂ ; the first-order conditions of 𝑒 in efficient and optimal mechanisms

are Λ 𝑒 (𝑞̂(𝜃), 𝑒̂ (𝜃)) − 𝑔𝑒 (𝑒̂ (𝜃)) = 0 (A4) and Λ 𝑒 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) − 𝑔𝑒 (𝑒 ∗ (𝜃)) = 0 (A5)

separately. If Λ 𝑒𝑞 > 0, check one possible movement: 𝑞̂ > 𝑞 ∗ and 𝑒̂ < 𝑒 ∗ . Recall Λ 𝑒𝑒 < 0 and

Λ 𝑒𝑞 > 0. Compared with 𝑞̂ and 𝑒̂ , both greater 𝑒 ∗ and lower 𝑞 ∗ cause the decrease of Λ 𝑒 in (A5).

Thus, given that 𝑞̂ and 𝑒̂ are the solutions of (A4), the LHS of (A5) yields Λ 𝑒 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) −

𝑔𝑒 (𝑒 ∗ (𝜃)) < 0 , contradicting with the FOC in the optimal mechanism. Therefore, the

inequalities Λ 𝑒𝑞 > 0, 𝑞̂ > 𝑞 ∗ and 𝑒̂ < 𝑒 ∗ cannot simultaneously exist. Thus, if Λ 𝑒𝑞 > 0, we have

𝑞̂ > 𝑞 ∗ and 𝑒̂ > 𝑒 ∗ . By similar arguments, if Λ 𝑒𝑞 < 0 it follows that 𝑞̂ > 𝑞 ∗ and 𝑒̂ < 𝑒 ∗ . Q.E.D.

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Proof of Proposition 7. Recall that the first order conditions for type 𝜃 bidder are

∂𝑈𝑏 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃))⁄∂𝑞 = 0 and ∂𝑈𝑏 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃))⁄∂𝑒 = 0. Taking the derivative with respect

to 𝜏, we have
∗ (𝜃) ∂2 𝑈∗ (𝜃) ∂2 𝑈∗ (𝜃) ∂2 𝑈∗ (𝜃) ∗ (𝜃) ∂2 𝑈∗ (𝜃) ∂2 𝑈∗ (𝜃) ∂2 𝑈∗ (𝜃)
∂2 𝑈𝑏
∂2 𝑈𝑏 𝑏 𝑏 𝑏 𝑏 𝑏 𝑏
∙ − ∙ ∙ − ∙
∂𝑞 ∂𝑒 ∂𝜏 ∂𝑒 ∂𝑒2 ∂𝜏 ∂𝑞 ∂𝑞 ∂𝑒 ∂𝜏 ∂𝑞 ∂𝑞2 ∂𝜏 ∂𝑒
𝑞𝜏∗ = 2 (A6), 𝑒𝜏∗ = 2 (A7).
∂2 𝑈∗𝑏 (𝜃) ∂2 𝑈∗𝑏 (𝜃) ∂2 𝑈∗𝑏 (𝜃) ∗ (𝜃) ∂2 𝑈∗ (𝜃)
∂2 𝑈𝑏 𝑏 ∂2 𝑈∗𝑏 (𝜃)
∙ −( ) ∙ −( )
∂𝑞2 ∂𝑒2 ∂𝑞 ∂𝑒 ∂𝑞2 ∂𝑒2 ∂𝑞 ∂𝑒

Under additive uncertainty, when 𝜆(∆𝑞) is linear, ∂2 𝑈𝑏∗ / ∂𝜏 ∂𝑞 = 0 and ∂2 𝑈𝑏∗ (𝜃)/ ∂𝜏 ∂𝑒 = 0 (by

envelope theorem), which lead to 𝑞𝜏∗ = 0 and 𝑒𝜏∗ = 0. When 𝜆(∆𝑞) is nonlinear, we can prove

∂2 𝑈 ∗ 1−𝑘 ∂2 𝑈 ∗ ∂2 𝑈 ∗ 1−𝑘 ∂2 𝑈 ∗ 𝑟
the following relationships: ∂𝜏 ∂𝑞𝑏 = − ∙ ∂𝜏 ∂𝑒𝑏 (A8) and ∂𝑞 ∂𝑒𝑏 = − ∙ ( ∂𝑒 2𝑏 + 𝑔𝑒𝑒 ) = − 1−𝑘 ∙
𝑟 𝑟

∂2 𝑈 ∗
( ∂𝑞2𝑏 − 𝑠𝑞𝑞 + 𝑐𝑞𝑞 ) (A9). Based on (A8) and (A9), (A6) and (A7) can be rewritten as

𝑘−1 ∂2 𝑈∗𝑏 (𝜃) ∂2 𝑈∗𝑏 (𝜃)

∙𝑔𝑒𝑒 ∙ (𝑐𝑞𝑞 −𝑠𝑞𝑞 )∙
𝑞𝜏∗ = 𝑟
∗ (𝜃) ∂2 𝑈∗ (𝜃)
∂𝜏 ∂𝑒
∗ (𝜃) 2
(A10), 𝑒𝜏∗ = ∗ (𝜃) ∂2 𝑈∗ (𝜃)
∂𝜏 ∂𝑒
2 (A11)
∂2 𝑈𝑏 𝑏 ∂2 𝑈𝑏 ∂2 𝑈𝑏 𝑏 ∂2 𝑈∗𝑏 (𝜃)
2 ∙ 2 −( ) 2 ∙ 2 −( )
∂𝑞 ∂𝑒 ∂𝑞 ∂𝑒 ∂𝑞 ∂𝑒 ∂𝑞 ∂𝑒

Due to the concavity of 𝜆(∆𝑞), we have

∂2 𝑈𝑏∗ 𝑟 𝜏 ∙ 𝜆′ (𝑟𝑒 − (1 − 𝑘)𝑞 + 𝑎 + 𝜏)

= 𝜏2 { } < 0. (A12)
∂𝜏 ∂𝑒 −[𝜆(𝑟𝑒 − (1 − 𝑘)𝑞 + 𝑎 + 𝜏) − 𝜆(𝑟𝑒 − (1 − 𝑘)𝑞 + 𝑎)]

(A11) and (A12) yield 𝑒𝜏∗ < 0 and 𝑞𝜏∗ < (>)0 if 𝑘 > (<)1.

Similarly, the impact of 𝜎 on the optimal promised quality 𝑞 ∗ and effort 𝑒 ∗ can be derived based

∂2 𝑈𝑏∗ (𝜃) ∂2 Λ(𝑞,𝑒,𝜎)

on the fact that = . Q.E.D.
∂𝜎 ∂𝑒 ∂𝜎 ∂𝑒

Proof of Proposition 8. By Lemma 3 and Proposition 4, the buyer’s maximum expected utility

is 𝐸𝜃(1) (𝑈𝑏∗ ). Thus, the impact of  on buyer utility is determined by the sign of ∂𝑈𝑏∗ / ∂𝜏. With

linear 𝜆(∆𝑞) = 𝜇 ∙ ∆𝑞 ( 𝜇 > 0), we have ∂𝑈𝑏∗ / ∂𝜏 = 𝜇/2, which is a positive constant. Under

∂𝑈𝑏∗ 1 a+𝜏
nonlinear 𝜆(∆𝑞), we have = 𝜏2 [𝜏𝜆(𝑟𝑒 − (1 − 𝑘)𝑞 + 𝑎 + 𝜏) − ∫a 𝜆(𝑟𝑒 − (1 − 𝑘)𝑞 + 𝑎 +
∂𝜏

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𝜀)𝑑𝜀 ] > 0, due to the concavity of 𝜆(∆𝑞). Thus, the buyer’s expected revenue increases in 𝜏.

Similarly, the impact of 𝜎 on the buyer utility can also be derived.

Now we focus on the adjustment of distortion. Recall that the optimal promised quality in the

bid is independent of 𝜏 under linear 𝜆(∆𝑞) (Proposition 7), scoring rule 𝐷(𝑞) keeps the same

distortion for the same 𝑞 when 𝜏 increases. While, 𝑞 increases in 𝜏 if 𝑘 < 1 under nonlinear

𝜆(∆𝑞) . In this case, suppose 𝜏1 < 𝜏2 , and denote the promised quality as 𝑞 ∗ (𝜃1 , 𝜏1 ) and

𝑞 ∗ (𝜃1 , 𝜏2 ) for type 𝜃1 under 𝜏1 and 𝜏2 respectively; thus 𝑞 ∗ (𝜃1 , 𝜏1 ) < 𝑞 ∗ (𝜃1 , 𝜏2 ). Since promised

quality decreases in 𝜃 (Proposition 1), there always exists a specific pseudo-supplier with type

𝜃2 ( 𝜃2 < 𝜃1 ) who bids 𝑞 ∗ (𝜃2 , 𝜏1 ) under  1 such that 𝑞 ∗ (𝜃2 , 𝜏1 ) = 𝑞 ∗ (𝜃1 , 𝜏2 ) . Denote the

distortions as 𝐷(𝑞 ∗ (𝜃2 , 𝜏1 )) under 𝜏1 and 𝐷(𝑞 ∗ (𝜃1 , 𝜏2 )) under 𝜏2 . Noticing 𝑞 ∗ (𝜃2 , 𝜏1 ) =

𝑞 ∗ (𝜃1 , 𝜏2 ) and 𝜃2 < 𝜃1 , 𝐷(𝑞 ∗ (𝜃2 , 𝜏1 )) < 𝐷(𝑞 ∗ (𝜃1 , 𝜏2 )) is immediate from the fact that 𝐷(𝑞)

increases in 𝜃 due to regularity condition. Q.E.D.

Proof of Proposition 9. When the performance of promised quality in bid is certain, for the

bidder’s problem, the first-order condition w.r.t. 𝑞 is 𝑠𝑞 (𝑞 ∗ (𝜃)) − 𝑐𝑞 (𝑞 ∗ (𝜃), 𝜃) = −𝛼 ∙

Φ𝑞 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)), where Φ𝑞 > 0. Compared with the scenario of uncertain performance of

promised quality, the FOC is 𝑠𝑞 (𝑞 ∗ (𝜃)) − 𝑐𝑞 (𝑞 ∗ (𝜃), 𝜃) = −𝛼 ∙ Λ 𝑞 (𝑞 ∗ (𝜃), 𝑒 ∗ (𝜃)) . When the

reference role of promised quality dominates the enhancement role, we have Λ 𝑞 < 0. Due the

concavity of 𝑠(𝑞(𝜃)) − 𝑐(𝑞(𝜃), 𝜃) , a higher promised quality with certain performance is

immediate. Further a higher information rent follows from 𝑐𝜃 > 0 , 𝑐𝑞𝜃 > 0 and the higher

promised quality. Q.E.D.

Proof of Proposition 10. Note that type 𝜉 bidder chooses 𝑞 ∗ to maximize the pseudotype 𝑠(𝑞) −

𝑔(𝜑 −1 (𝑞), 𝜉) + 𝛼 ∙ Λ(𝑞), and the bid price can be derived in a standard way. For the efficient

9
mechanism, scheme 𝑠 𝐸 (𝑞) = 𝑉(𝑞) + (1 − 𝛼) · Ʌ(𝑞) , ∀𝛼 ∈ [0,1] makes the bidder maximize

social welfare 𝑊(𝑞) = 𝑉(𝑞) − g(𝜑 −1 (𝑞), 𝜉) + Ʌ(𝑞). Under the proposed optimal scoring rule

𝑠 𝐸 (𝑞) = 𝑉(𝑞) − 𝐷𝐸 (𝑞) + (1 − 𝛼) · Ʌ(𝑞), ∀𝛼 ∈ [0,1], we can prove that the bidder’s decision 𝑞

maximizes the buyer’s utility 𝑊(𝑞(𝜉)) − g 𝜉 (𝜑 −1 (𝑞(𝜉)), 𝜉)𝐽(𝜉)⁄𝑗(𝜉). In detail, it is routine to

verify the first-order and the second-order conditions (omitted), similar to the proof of

Proposition 4. Q.E.D.

References

Milgrom, P. R. 1989. Auctions and bidding: A primer. Journal of Economic Perspectives 3(3) 3-
22.
Riley, J. G., W. F. Samuelson. 1981. Optimal auctions. American Economic Review 71(3) 381-
392.

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