Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement

Albano, Gian Luigi; Cesi, Berardino; Iozzi, Alberto

Abstract

This paper shows that, in a repeated competitive procurement, a buyer can use the reserve price in a low-price auction as a “public”—hence nondiscriminatory—incentive device to elicit unverifiable quality. We study a model with many firms and one buyer, who is imperfectly informed on the firms' costs. When firms are ex ante identical, the provision of quality is sustained by a sufficiently high reserve price to reward firms for the quality provision and by the threat of setting a low reserve price forever, if quality is not delivered. The buyer can elicit the desired level of unverifiable quality provided her baseline valuation of the project is not too high and the net benefit from unverifiable quality is not too low. These results are robust to firms' heterogeneity in their time preferences when the punishment for a deviation is finite but sufficiently long.

Citation

Albano, G. L., Cesi, B., & Iozzi, A. (2023). Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement. Journal of Economics & Management Strategy, 32(2), 377-399. https://doi.org/10.1111/jems.12509

• Journal Article Type: Article
• Online Publication Date: Dec 22, 2022
• Publication Date: Jun 1, 2023
• Deposit Date: Jan 2, 2023
• Journal: Journal of Economics and Management Strategy
• Print ISSN: 1058-6407
• Electronic ISSN: 1530-9134
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 32
• Issue: 2
• Pages: 377-399
• DOI: https://doi.org/10.1111/jems.12509
• Publisher URL: https://art.torvergata.it/bitstream/2108/228341/1/SSRN-id2963737-1.pdf
• Related Public URLs: https://onlinelibrary.wiley.com/doi/10.1111/jems.12509