Past Performance and Procurement Outcomes

Francesco Decarolis, Giancarlo Spagnolo, Riccardo Pacini

NBER Working Paper No. 22814
Issued in November 2016, Revised in November 2016
NBER Program(s):Health Care, Industrial Organization, Public Economics

Reputational incentives may be a powerful mechanism for improving supplier performance. We analyze their role in contract awarding, exploiting an experiment run by a firm which introduced a new vendor rating system scoring suppliers' past performance and linking it to the award of future contracts. We study responses in both price and performance to the announcement of the switch from price-only to price-and-rating auctions. Across the 136 parameters scored, overall compliance improves from 25 percent to 80 percent. Improvements involve all parameters and suppliers, but are more pronounced for parameters receiving a higher weight in the announced scoring auction. Prices do not significantly change overall, but we find some evidence of lower prices right after the announcement when suppliers compete to win contracts to get scored, and of higher prices once they have established a good reputation. Even under an upper bound estimate for this price increase, however, the cost of the policy is below its lower bound benefit estimate, which derives from a reduction in fatal accidents driven by improvements on the subset of parameters involving worksite safety.

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Document Object Identifier (DOI): 10.3386/w22814

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