Procurement Contracts and Second Sourcing

Second, we analyze a procurement model where a procurer obtains an indivisible service from a contractor. The quality of this service is variable. Quality is determined by effort, investment and the realization of a random variable. Neither quality nor investment is verifiable. This means the compensation the procurer pays the contractor cannot vary with quality or investment (no piece rates). The reward for the incumbent and the probability of switching suppliers cannot be made contingent to the value of a verifiable variable. The compensation can vary over time, since the time period is verifiable. Between periods the procurer decides to retain the original contractor or to switch suppliers. Switching may be sensible because the model also entails matching, that is, the random components of quality are serially correlated. The contractor should find a new supplier when in a bad match. The observed quality is a signal of the goodness of the match. Since quality is not verifiable and the switching decision cannot be contracted upon, the contractor keeps the original supplier when quality is above a certain level and switches otherwise. We show how the equilibrium investment, effort, and quality cutoff are determined.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2015

Author dc:creator

• Basanes, Carlos Federico

Contributors dc:contributor

• Lanny Arvan

• Economics, Theory

Language dc:language

eng

Identifier

(MiAaPQ)AAI9737046

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/85609