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Moral hazard in repeated procurement of services

Patricia Esteve-González
Authors registered in the RePEc Author Service: Patricia Esteve González ()

International Journal of Industrial Organization, 2016, vol. 48, issue C, 244-269

Abstract: This paper analyzes repeated procurement of services as a two period model with a potential repeated agency relationship. In the first period, there is an incumbent who provides a service. In the second period, there is a contest stage in which the principal selects the next service provider. The agents’ effort is non-contractible and the contest stage is the mechanism to mitigate potential moral hazard problems. The principal takes account of the past service effort in the contest stage by choosing the weight of past effort and the degree of substitutability between past and current efforts. The results show that, when the principal does not value contest effort, considering past effort as the relevant effort in the contest is optimal. When the principal values contest effort and effort cost increases, decreasing substitutability between efforts is optimal.

Keywords: Biased contest; Moral hazard; Incentives (search for similar items in EconPapers)
JEL-codes: C72 D72 D82 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Moral Hazard in Repeated Procurement of Services (2014) Downloads
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DOI: 10.1016/j.ijindorg.2016.06.008

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