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Moral hazard in repeated procurement of services

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  • Esteve-González, Patricia

Abstract

This paper analyzes repeated procurement of services as a two period model with a potential repeated agency relationship. In the first period, there is an incumbent who provides a service. In the second period, there is a contest stage in which the principal selects the next service provider. The agents’ effort is non-contractible and the contest stage is the mechanism to mitigate potential moral hazard problems. The principal takes account of the past service effort in the contest stage by choosing the weight of past effort and the degree of substitutability between past and current efforts. The results show that, when the principal does not value contest effort, considering past effort as the relevant effort in the contest is optimal. When the principal values contest effort and effort cost increases, decreasing substitutability between efforts is optimal.

Suggested Citation

  • Esteve-González, Patricia, 2016. "Moral hazard in repeated procurement of services," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 244-269.
    • Handle: RePEc:eee:indorg:v:48:y:2016:i:c:p:244-269
    DOI: 10.1016/j.ijindorg.2016.06.008
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    More about this item

    Keywords

    Biased contest; Moral hazard; Incentives;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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