Unverifiable quality may affect the enforcement of procurement contracts even when the award procedure is able to select the most efficient firm in the market. In this paper, we show that a discriminatory competitive mechanism – which awards the contract on the basis of price and (firms') past performance – yields an efficient allocation of the contract and allows the buyer to implement her desired quality. Quality enforcement arises out of relational contracting whereby the buyer ‘handicaps' a contractor in future competitive tendering processes if it fails to provide the required quality. We study an infinitely repeated procurement model with two firms and one buyer imperfectly informed on the firms' cost, in which, in each period, the buyer runs a discriminatory auction. We restrict our analysis to the case of a buyer committed to her handicapping strategy, a case which captures some of the features of a public buyer. When players use either grim trigger or stick-and-carrot strategies, we find that the buyer can induce the delivery of optimal (unverifiable) quality with a variety of handicap levels and, when applicable, durations of the punishment period; for some values of the handicap and the length of the punishment period, both firms remain active in the market even when punished.

Albano, G., Cesi, B., Iozzi, A. (2017). Public procurement with unverifiable quality: The case for discriminatory competitive procedures. JOURNAL OF PUBLIC ECONOMICS, 145, 14-26 [10.1016/j.jpubeco.2016.11.004].

Public procurement with unverifiable quality: The case for discriminatory competitive procedures

CESI, BERARDINO;IOZZI, ALBERTO
2017

Abstract

Unverifiable quality may affect the enforcement of procurement contracts even when the award procedure is able to select the most efficient firm in the market. In this paper, we show that a discriminatory competitive mechanism – which awards the contract on the basis of price and (firms') past performance – yields an efficient allocation of the contract and allows the buyer to implement her desired quality. Quality enforcement arises out of relational contracting whereby the buyer ‘handicaps' a contractor in future competitive tendering processes if it fails to provide the required quality. We study an infinitely repeated procurement model with two firms and one buyer imperfectly informed on the firms' cost, in which, in each period, the buyer runs a discriminatory auction. We restrict our analysis to the case of a buyer committed to her handicapping strategy, a case which captures some of the features of a public buyer. When players use either grim trigger or stick-and-carrot strategies, we find that the buyer can induce the delivery of optimal (unverifiable) quality with a variety of handicap levels and, when applicable, durations of the punishment period; for some values of the handicap and the length of the punishment period, both firms remain active in the market even when punished.
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore SECS-P/01 - Economia Politica
Settore SECS-P/02 - Politica Economica
Settore SECS-P/03 - Scienza delle Finanze
Settore SECS-P/06 - Economia Applicata
English
Con Impact Factor ISI
Public procurement; Relational contracts; Unverifiable quality; Handicap
http://www.sciencedirect.com/science/article/pii/S004727271630161X
Albano, G., Cesi, B., Iozzi, A. (2017). Public procurement with unverifiable quality: The case for discriminatory competitive procedures. JOURNAL OF PUBLIC ECONOMICS, 145, 14-26 [10.1016/j.jpubeco.2016.11.004].
Albano, G; Cesi, B; Iozzi, A
Articolo su rivista
File in questo prodotto:
File Dimensione Formato  
ALCEIO published JpubEc.pdf

non disponibili

Licenza: Copyright dell'editore
Dimensione 703.35 kB
Formato Adobe PDF
703.35 kB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2108/173143
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 15
  • ???jsp.display-item.citation.isi??? 14
social impact