Discussion paper

DP4540 Contract Renewal and Incentives in Public Procurement

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.

£6.00
Citation

Moen, E, C Riis and D Dalen (2004), ‘DP4540 Contract Renewal and Incentives in Public Procurement‘, CEPR Discussion Paper No. 4540. CEPR Press, Paris & London. https://cepr.org/publications/dp4540