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Past Performance Evaluation in Repeated Procurement: A Simple Model of Handicapping

Author

Listed:
  • Berardino Cesi

    (University "G. D.Annunzio")

  • Gian Luigi Albano

    (Italian Public Procurement Agency (Consip S.p.A.))

Abstract

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”.

Suggested Citation

  • Berardino Cesi & Gian Luigi Albano, 2008. "Past Performance Evaluation in Repeated Procurement: A Simple Model of Handicapping," Working Papers 2008.19, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2008.19
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    File URL: http://www.feem.it/userfiles/attach/Publication/NDL2008/NDL2008-019.pdf
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    References listed on IDEAS

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    1. 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.
    2. Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
    3. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
    4. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    5. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    6. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Brosig, Jeannette & Heinrich, Timo, 2011. "Reputation and Mechanism Choice in Procurement Auctions – An Experiment," Ruhr Economic Papers 254, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Ciaccia, Gervasio & Doni, Nicola & Fontini, Fulvio, 2010. "Auctioning wind power sites when environmental quality matters," Energy Policy, Elsevier, vol. 38(4), pages 1734-1740, April.
    3. repec:eee:hepoli:v:121:y:2017:i:5:p:515-524 is not listed on IDEAS
    4. Esteve-González, Patricia, 2016. "Moral hazard in repeated procurement of services," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 244-269.
    5. Jeanette Brosig & Timo Heinrich, 2011. "Reputation and Mechanism Choice in Procurement Auctions – An Experiment," Ruhr Economic Papers 0254, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    6. repec:zbw:rwirep:0254 is not listed on IDEAS

    More about this item

    Keywords

    Repeated Procurement; Handicapping; Relational Contracts; Stick and Carrot Strategy;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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