'Relational' Procurement Contracts: A Simple Model of Reputation Mechanism

33 Pages Posted: 15 Jul 2011

See all articles by Gian Luigi Albano

Gian Luigi Albano

Consip S.p.A. - The National Central Purchasing Body; LUISS "G. Carli", Department of Economics and Finance

Berardino Cesi

University "G. D.Annunzio"

Alberto Iozzi

Universita degli Studi di Roma

Multiple version iconThere are 2 versions of this paper

Date Written: July 11, 2011

Abstract

We show how repeatedly awarded procurement contracts where unverifiable quality dimensions are relevant can be reinterpreted as relational contracts between a buyer and a contractor that is threatened by a potentially less efficient competitor. We compare two scenarios: 1) Under freedom of choices the (public) buyer freely chooses the contractor, the price and the (unverifiable) quality it should stick to, 2) in a competitive discretionary tendering the buyer evaluates differently the bids of the suppliers by means of a handicap, based on the firm's past performance. We show that, firms' costs are common knowledge, relational discriminatory tenderings replicates the results of long term contracting (freedom of choice). The handicap ensures the existence of a relational contract under which the buyer selects the more efficient firm and pays it a price higher than its cost, and the firm delivers the required quality. This outcome is an equilibrium when the cost of quality is not too high, and the players' discount factor and the valuation of quality are not small. A self-enforcing relational contract entails an handicap which is closer to the difference between the firms' specific-cost, the lower is the variable cost of quality and the higher is the players' discount factor.

Keywords: public procurement, relational contracts, unverifiable

Suggested Citation

Albano, Gian Luigi and Cesi, Berardino and Iozzi, Alberto, 'Relational' Procurement Contracts: A Simple Model of Reputation Mechanism (July 11, 2011). Available at SSRN: https://ssrn.com/abstract=1884979 or http://dx.doi.org/10.2139/ssrn.1884979

Gian Luigi Albano (Contact Author)

Consip S.p.A. - The National Central Purchasing Body ( email )

Via Isonzo, 19/E
Rome, 00198
Italy
+39 06 85449.627 (Phone)

LUISS "G. Carli", Department of Economics and Finance ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Berardino Cesi

University "G. D.Annunzio" ( email )

Chieti, Pescara
Italy

Alberto Iozzi

Universita degli Studi di Roma ( email )

Via Columbia n.2
Rome, rome 00100
Italy
39 06 7259 5923 (Phone)
39 06 204 02 19 (Fax)

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