Contractors' Past Performance and Procurement Outcomes: A Firm-level Experiment

Reputational incentives may be a powerful mechanism for improving supplier performance. We analyze their role in contract awarding, exploiting an experiment run by a multi-utility company which introduced a new vendor rating system scoring suppliers' past performance and linking it to the award of future contracts. We study responses in both price and performance to the announcement of the switch from price-only to price-and-rating auctions. Across the 136 parameters scored, overall compliance improves from 25 percent to 80 percent. Improvements involve all parameters and suppliers, but are more pronounced for parameters receiving a higher weight in the new scoring auction. Prices do not signicantly change overall. However, we find some evidence of lower prices right after the announcement when firms compete to win contracts to get scored, and of higher prices once all firms have established a good reputation. The experiment suggests that the gains from curtailing suppliers' moral hazard when executing contracts may be higher than those from always bolstering price competition.