Thursday, July 24, 2014

Reputation and Entry in Procurement

Jeff Butler, Enrica Carbone, Pierluigi Conzo, and Giancarlo Spagnolo (Stockholm School of Economics, Universita di Roma Tor Vergata) discuss Reputation and Entry in Procurement.

ABSTRACT: There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers.

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