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Sticks and Carrots in Procurement: An Experimental Exploration

Author

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  • Bigoni Maria

    (University of Bologna, Department of Economics, Piazza Scaravilli 2, 40126, Bologna, Italy)

  • Spagnolo Giancarlo

    (Stockholm School of Economics, SITE, Stockholm, Sweden; University of Rome Tor Vergata, Roma, Italy, CEPR)

  • Valbonesi Paola

    (University of Padova, Department of Economics and Management, Padova, Italy; National Research University, Higher School of Economics, Moscow, Russia)

Abstract

We test the robustness of recent findings on the benefits of penalty contracts to the environments typical of B2B (and B2G) procurement, where buyers and sellers interact repeatedly, matching is endogenous and competitive, there are contractible and non-contractible tasks, and reputation-based relationships can emerge. Both bonuses and penalties boost efficiency, strongly increasing effort in the contractible task while only mildly crowding it out in the non-contractible one. However, sellers grab a higher fraction of surplus with bonuses, as buyers’ offers become more generous. Consequently, buyers prefer penalties, which may explain why they are so widespread in procurement.

Suggested Citation

  • Bigoni Maria & Spagnolo Giancarlo & Valbonesi Paola, 2014. "Sticks and Carrots in Procurement: An Experimental Exploration," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(3), pages 893-936, July.
    • Handle: RePEc:bpj:bejeap:v:14:y:2014:i:3:p:44:n:18
    DOI: 10.1515/bejeap-2013-0110
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    Cited by:

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    2. Gian Luigi Albano & Berardino Cesi & Alberto Iozzi, 2023. "Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 377-399, April.
    3. Arshad Ali Javed & Patrick T.I. Lam & Albert P.C. Chan, 2014. "Change negotiation in public-private partnership projects through output specifications: an experimental approach based on game theory," Construction Management and Economics, Taylor & Francis Journals, vol. 32(4), pages 323-348, April.
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    5. Pyddoke, Roger, 2020. "Penalties as incentives for punctuality and regularity in tendered Swedish public transport," Research in Transportation Economics, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    bonuses; B2B and B2G transactions; buyer–seller frame; experiment; explicit incentives; incomplete contracts; loss-aversion; multitasking; penalties; procurement; relational contract.;
    All these keywords.

    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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