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Contract renewal and incentives in public procurement

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  • Dalen, Dag Morten
  • Moen, Espen R.
  • Riis, Christian

Abstract

This Paper explores how the government’s choice of renewal policy in public procurement programmes can be used as a mechanism to provide firms with incentives to supply quality. Several firms produce a public service. The firms participate in a tournament where they are ranked according to the quality of their services, and rewarded in terms of contract renewals. We analyse the firms’ incentives to produce high-quality services, and find that they are maximized if 50% of the contracts are renewed. The optimal renewal policy trades off incentive provision (which requires that a relatively large fraction of the firms are replaced each period) against the entry costs of new firms.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 24 (2006)
Issue (Month): 2 (March)
Pages: 269-285

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Handle: RePEc:eee:indorg:v:24:y:2006:i:2:p:269-285

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Oliver Hart & Andrei Shleifer & Robert Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," Harvard Institute of Economic Research Working Papers 1778, Harvard - Institute of Economic Research.
  2. Productivity Commission, 2002. "Independent review of the Job Network," Labor and Demography 0210002, EconWPA.
  3. Clark, Derek J & Riis, Christian, 1998. "Competition over More Than One Prize," American Economic Review, American Economic Association, vol. 88(1), pages 276-89, March.
  4. Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers 9123, Wisconsin Madison - Social Systems.
  5. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  6. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
  7. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-99, June.
    • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
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Cited by:
  1. Chiara D'Alpaos & Michele Moretto & Paola Valbonesi, 2008. "Optimal penalty for investment delay in public procurement contracts," "Marco Fanno" Working Papers 0074, Dipartimento di Scienze Economiche "Marco Fanno".
  2. GAUTIER, Axel & YVRANDE-BILLON, Anne, 2008. "Contract renewal as an incentive device. An application to the French urban public transport sector," CORE Discussion Papers 2008068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Lindqvist, Erik, 2008. "Will Privatization Reduce Costs?," Working Paper Series 736, Research Institute of Industrial Economics.
  4. Chiara D'Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2009. "It is never too late: Optimal penalty for investment delay in public procurement contracts," Working Papers 0907, University of Brescia, Department of Economics.
  5. Andrey Yakovlev & Andrey Tkachenko & Olga Demidova & Olga Balaeva, 2013. "An impact of different regulatory regimes on the effectiveness of public procurement," HSE Working papers WP BRP 08/PA/2013, National Research University Higher School of Economics.

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