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Abstract

In a repeated competitive procurement framework, this paper shows that a buyer is able to elicit the provision of unverifiable quality by strategically using the reserve price, while treating all competing firms equally as prescribed by several procurement regulations worldwide. We study an infinitely repeated procurement model with many firms and one buyer, who is imperfectly informed on the firms’ cost. In each period, the buyer runs a standard low-price auction with a publicly announced reserve price. We study both the case of an uncommitted and committed buyer. Under the assumption of lack of commitment, the buyer can elicit the desired level of unverifiable quality provided her baseline valuation of the project is not too high and the marginal value of unverifiable quality is not too low. A committed buyer can elicit the desired quality level for a wider range of preference parameters.

Keywords:

public procurement; relational contracts; unverifiable quality; reserve price