Working Paper: CEPR ID: DP4540
Authors: Dag Morten Dalen; Espen R. Moen; Christian Riis
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.
Keywords: contract renewal; public procurement; quality; tournament
JEL Codes: D44; L33; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government's contract renewal decisions (L33) | Firms' incentives to provide quality services (L15) |
| Threat of non-renewal of contracts for poor performance (D86) | Firms' incentives to maintain high quality (L15) |
| Optimal contract renewal policy (50% renewal) (D86) | Incentives for quality provision (L15) |
| Increasing replacement rate of firms (D25) | Incentives for quality provision (L15) |
| Increasing replacement rate of firms (D25) | Higher entry costs (D49) |