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http://hdl.handle.net/10419/40648
  
Title:Past performance evaluation in repeated procurement: A simple model of handicapping PDF Logo
Authors:Albano, Gian Luigi
Cesi, Berardino
Issue Date:2008
Series/Report no.:Nota di lavoro // Fondazione Eni Enrico Mattei: PRCG, Privatisation, regulation, corporate governance 2008,19
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".
Subjects:Repeated Procurement
Handicapping
Relational Contracts
Stick and Carrot Strategy
JEL:C73
D82
D44
H57
K12
L14
Document Type:Working Paper
Appears in Collections:FEEM Working Papers, Fondazione Eni Enrico Mattei

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