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Article
Sticks and Carrots in Procurement: an experimental exploration.
The B.E. Journal of Economic Analysis and Policy (2014)
  • Paola Valbonesi
  • Maria Bigoni, University of Bologna
  • Giancarlo Spagnolo
Abstract

We test the robustness of recent findings on the benefits of explicit contracts framed as penalties to the complex environments typical of B2B (and B2G) procurement, where penalty contracts are common. In our framework, matching is endogenous and competitive, there are contractible and non-contractible tasks, subjects play repeatedly and maintain their identity so that reputation-based relationships can form. We find that the introduction of explicit incentives boosts efficiency, strongly increasing effort in the contractible task while only mildly crowding it out in the non-contractible one. Bonuses and penalties are equivalent for efficiency and crowding-out, but different in distributional effects: sellers’ surplus increases significantly with bonuses as buyers’ offers become more generous. Consistently, buyers tend to prefer penalties, which may help explaining why they are so widespread in procurement.

Keywords
  • bonuses,
  • business-to-business,
  • contract choice,
  • experiment,
  • framing,
  • explicit incentives,
  • incomplete contract,
  • loss-aversion,
  • motivation,
  • penalties,
  • procurement,
  • multi-tasking,
  • relational contracts,
  • rewards.
Publication Date
2014
Publisher Statement
M. Bigoni, G. Spagnolo and P. Valbonesi. “Sticks and Carrots in Procurement: An Experimental Exploration,” The B.E. Journal of Economic Analysis & Policy, 14(3), 2014.
Citation Information
Paola Valbonesi, Maria Bigoni, and Giancarlo Spagnolo. "Sticks and Carrots in Procurement: an experimental exploration". The B.E. Journal of Economic Analysis & Policy, 14(3), 2014.