Discussion Paper Details

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Title: Contract Renewal and Incentives in Public Procurement

Author(s): Dag Morten Dalen, Espen R Moen and Christian Riis

Publication Date: August 2004

Keyword(s): contract renewal, public procurement, quality and tournament

Programme Area(s): Industrial Organization and Public Economics

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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Bibliographic Reference

Dalen, D, Moen, E and Riis, C. 2004. 'Contract Renewal and Incentives in Public Procurement'. London, Centre for Economic Policy Research.