Contract Renewal and Incentives in Public Procurement

Dag Morten Dalen, Espen R. Moen and Christian Riis ()

No 4540, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D44 L33 L51 (search for similar items in EconPapers)
Date: 2004-08
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Related works:
Journal Article: Contract renewal and incentives in public procurement (2006)
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