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Contract renewal and incentives in public procurement

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  • Dalen, Dag Morten
  • Moen, Espen R.
  • Riis, Christian
Abstract
This Paper explores how the government?s choice of renewal policy in public procurement programmes can be used as a mechanism to provide firms with incentives to supply quality. Several firms produce a public service. The firms participate in a tournament where they are ranked according to the quality of their services, and rewarded in terms of contract renewals. We analyse the firms? incentives to produce high-quality services, and find that they are maximized if 50% of the contracts are renewed. The optimal renewal policy trades off incentive provision (which requires that a relatively large fraction of the firms are replaced each period) against the entry costs of new firms.
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Suggested Citation

  • Dalen, Dag Morten & Moen, Espen R. & Riis, Christian, 2006. "Contract renewal and incentives in public procurement," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 269-285, March.
    • Handle: RePEc:eee:indorg:v:24:y:2006:i:2:p:269-285
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    1. Benny Moldovanu & Aner Sela, 2008. "The Optimal Allocation of Prizes in Contests," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 615-631, Springer.
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    Cited by:

    1. Lindqvist, Erik, 2007. "Will Privatization Reduce Costs?," SSE/EFI Working Paper Series in Economics and Finance 660, Stockholm School of Economics.
    2. Chiara D'Alpaos & Michele Moretto & Paola Valbonesi, 2008. "Optimal penalty for investment delay in public procurement contracts," "Marco Fanno" Working Papers 0074, Dipartimento di Scienze Economiche "Marco Fanno".
    3. Gian Luigi Albano & Berardino Cesi & Alberto Iozzi, 2023. "Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 377-399, April.
    4. Albano, Gian Luigi & Cesi, Berardino & Iozzi, Alberto, 2017. "Public procurement with unverifiable quality: The case for discriminatory competitive procedures," Journal of Public Economics, Elsevier, vol. 145(C), pages 14-26.
    5. Mu, Rui & Jong, Martin de & Koppenjan, Joop, 2011. "The rise and fall of Public–Private Partnerships in China: a path-dependent approach," Journal of Transport Geography, Elsevier, vol. 19(4), pages 794-806.
    6. Jean Beuve & Stéphane Saussier, 2021. "Renegotiations and Renewals of Public Contracts," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(3), pages 461-482, November.
    7. Lidestam, Helene, 2014. "Sustainable bus transports through less detailed contracts," Renewable Energy, Elsevier, vol. 61(C), pages 141-146.
    8. Axel Gautier & Anne Yvrande-Billon, 2013. "Contract Renewal as an Incentive Device. An Application to the French Urban Public Transport Sector," Review of Economics and Institutions, Università di Perugia, vol. 4(1).
    9. Lluis Bru & Daniel Cardona, 2016. "Strategic Sourcing in Procurement," DEA Working Papers 82, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    10. Andrei Yakovlev & Andrey Tkachenko & Olga Demidova & Olga Balaeva, 2015. "The Impacts of Different Regulatory Regimes on the Effectiveness of Public Procurement," International Journal of Public Administration, Taylor & Francis Journals, vol. 38(11), pages 796-814, September.
    11. Christian Riis, 2010. "Efficient Contests," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 643-665, September.
    12. Chiara D'Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2009. "It is never too late: Optimal penalty for investment delay in public procurement contracts," Working Papers 0907, University of Brescia, Department of Economics.
    13. Nicola Doni, 2006. "The Importance Of Reputation In Awarding Public Contracts," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 401-429, December.
    14. Mouwen, Arnoud & van Ommeren, Jos, 2016. "The effect of contract renewal and competitive tendering on public transport costs, subsidies and ridership," Transportation Research Part A: Policy and Practice, Elsevier, vol. 87(C), pages 78-89.
    15. Muhammad Alshurideh, 2017. "A Theoretical Perspective of Contract and Contractual Customer-Supplier Relationship in the Mobile Phone Service Sector," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(7), pages 201-201, June.
    16. Camén, Carolina & Lidestam, Helene, 2016. "Dominating factors contributing to the high(er) costs for public bus transports in Sweden," Research in Transportation Economics, Elsevier, vol. 59(C), pages 292-296.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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