The Importance of Reputation in Public Contract Bids

The Importance of Reputation in Public Contract Bids


Public procurement is valued as an important part of the European economy, accounting for 15% of its GDP. The directive 2014/24/EU introduced the possibility of using past performance information to limit bidders’ participation. It also states that public contracts can be awarded on the basis of many factors, not only price. The directive has opened the door to the introduction of reputational incentives in order to improve supplier performance.
In the working paper Past Performance and Procurement Outcomes, Francesco Decarolis, Riccardo Pacini and Giancarlo Spagnolo studied the outcome of an experiment run by a large multi-utility firm in Central Italy. The introduction of a reputation mechanism for suppliers who maintain the power grid had a significant impact on their performance.
“Over the course of a year, after the announcement of the switch from price-only to price-and-rating auctions, with a scoring rule assigning 25 percent to the reputation index, overall compliance improved from 25% to 80%”, professor Decarolis says. Prices lowered right after the announcement when suppliers competed to win contracts to get scored.
After having established a good reputation, though, the price increased by 9%. “According to our cost-benefit analysis, the price increase appears rather small when compared to the improvement in performance”. Yet the EU regards reputational incentives with suspicion, whereas in the US past performance has played a role in public procurement since the mid-1990s. “European lawmakers fear favoritism and corruption. Mostly important, they think that these mechanisms may prevent the creation of a single market, by favoring already established local suppliers”.

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