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

37 Pages Posted: 24 Oct 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

Berardino Cesi

University "G. D.Annunzio"

Alberto Iozzi

Universita degli Studi di Roma

Date Written: October 23, 2017

Abstract

In many circumstances, procurement contracts entail crucial unverifiable dimensions. In a repeated procurement auction framework, we show that by strategically using the reserve price, a buyer is able to elicit the provision of unverifiable quality. Thus the buyer need not resort to any past-performance-related mechanism, which makes the analysis relevant to those regulatory environments in which past performance cannot be used as a criterion to evaluate tenders.

We study an infinitely repeated procurement model with many firms and one buyer who is imperfectly informed on the firms' cost. 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 additional unverifiable 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 the selected contractor (if any) makes zero profits. A committed buyer can elicit the desired quality level for a wider range of preference parameters.

Keywords: Public Procurement, Relational Contracts, Unverifiable Quality, Reserve Price

JEL Classification: D44, H57, K23

Suggested Citation

Albano, Gian Luigi and Cesi, Berardino and Iozzi, Alberto, Teaching an Old Dog a New Trick: Reserve Price and Unverifiable Quality in Repeated Procurement (October 23, 2017). Available at SSRN: https://ssrn.com/abstract=3057659 or http://dx.doi.org/10.2139/ssrn.3057659

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

Berardino Cesi

University "G. D.Annunzio" ( email )

Chieti, Pescara
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)

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