Past Performance Evaluation in Repeated Procurement: A Simple Model of Handicapping
When procurement contracts are awarded through competitive tendering participating firms commit ex ante to fulfil a set of contractual duties. However, selected contractors may find profitable to renege ex post on their promises by opportunistically delivering lower quality standards. In order to deter ex post moral hazard, buyers may use different strategies depending on the extent to which quality dimensions are contractible, that is, verifiable by contracting parties and by courts. We consider a stylized repeated procurement framework in which a buyer awards a contract over time to two firms with different efficiency levels. If the contractor does not deliver the agreed level of performance the buyer may handicap the same firm in future competitive tendering. We prove that under complete information extremely severe handicapping is never a credible strategy for the buyer, rather the latter finds it optimal to punish the opportunistic firm so as to make the pool of competitors more alike. In other words, when opportunistic behaviour arises, the buyer should use handicapping to “level the playing field”.
|Date of creation:||Mar 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.feem.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
- Kreps, David M. & Wilson, Robert, 1982.
"Reputation and imperfect information,"
Journal of Economic Theory,
Elsevier, vol. 27(2), pages 253-279, August.
- Nicola Doni, 2006. "The Importance Of Reputation In Awarding Public Contracts," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 401-429, December.
- Bentley MacLeod, 2001.
"Optimal Contracting with Subjective Evaluation,"
Theory workshop papers
357966000000000036, UCLA Department of Economics.
- Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
- Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2008.19. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (barbara racah)
If references are entirely missing, you can add them using this form.