Limited liability and mechanism design in procurement

► We study how to minimize sponsorʼs cost if firms differ in their financial strength. ► In our procurement setup, cost uncertainty and limited liability may lead to default. ► Incentive compatible mechanisms select less solvent firms with higher probability. ► Informational rents are associated with the probability of default. ► Auctions may be suboptimal and pooling at higher net worth may reduce sponsorʼs cost.