Teaching an Old Dog a New Trick: Reserve Price and Unverifiable Quality in Repeated Procurement

35 Pages Posted: 5 May 2017

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

Cesi Berardino

University of Rome Tor Vergata - Tor Vergata Economics University Foundation

Alberto Iozzi

Universita degli Studi di Roma

Date Written: April 5, 2017

Abstract

In procurement markets, unverifiable quality provision may be obtained either by direct negotiation or by competitive processes which discriminate firms on the basis of their past performance. However, discrimination is not allowed in many institutional contexts. We show that a non-discriminatory competitive process with a reserve price may allow the buyer to yield an efficient allocation of the contract and to implement the level of quality desired by the buyer. Quality enforcement arises out of a relational contract whereby the buyer threatens to set a 'low' reserve price in future competitive tendering processes if any contractor fails to provide the required quality. We study an infinitely repeated procurement model with many firms and one buyer imperfectly informed on the firms' cost, in which, in each period, the buyer runs a standard low-price auction with reserve price. We study the cases of players using grim trigger strategies, analysing both the case of a committed and uncommitted buyer. We find that a competitive process with reserve price is able to elicit the desired level of unverifiable quality provided that the buyer's valuation of the project is not too high and the value of quality is not too low; under these conditions, the buyer can credibly threaten the firms to set, in case a contractor fails to deliver the required quality level, a reserve price so low that no firm is willing to participate to the tender. A committed buyer can elicit the desired quality level for a wider range of preference parameters.

Keywords: public procurement, relational contracts, unveriable quality, reserve price

JEL Classification: H57, D44

Suggested Citation

Albano, Gian Luigi and Berardino, Cesi and Iozzi, Alberto, Teaching an Old Dog a New Trick: Reserve Price and Unverifiable Quality in Repeated Procurement (April 5, 2017). CEIS Working Paper No. 404. Available at SSRN: https://ssrn.com/abstract=2963737 or http://dx.doi.org/10.2139/ssrn.2963737

Gian Luigi Albano

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

Cesi Berardino

University of Rome Tor Vergata - Tor Vergata Economics University Foundation ( email )

Via Columbia 2
Rome, 00133
Italy

Alberto Iozzi (Contact Author)

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)

Register to save articles to
your library

Register

Paper statistics

Downloads
32
Abstract Views
259
PlumX Metrics