DP9651 Reputation and Entry in Procurement

Author(s): Jeff Butler, Enrica Carbone, Pierluigi Conzo, Giancarlo Spagnolo
Publication Date: September 2013
Keyword(s): bid preferences, entry, feedback mechanisms, outsourcing, past performance, procurement, quality assurance, reputation, vendor rating
JEL(s): H57, L14, L15
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9651

There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers.