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Reputational incentives may be a powerful mechanism for improving supplier performance and limiting the perverse effect of price competition on contract execution. We analyze a unique experiment run by a large utility company in Italy which introduced a new vendor rating system scoring its 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. Average performance improves from 25 percent to 90 percent of the audited parameters. Improvements involve all parameters and suppliers, are long-lasting (for at least 10 years after the initial experiment) and are reflected in higher service quality by the utility. Contract prices do not significantly change overall, but we find evidence of lower prices right after the announcement when suppliers compete to win contracts to get scored, and of higher prices, once they have established a good reputation. We then argue that supplier moral hazard is the main force behind our findings. The main takeaway from this study is that the gains from curtailing supplier moral hazard may be higher than those from always bolstering price competition, and that a reputational mechanism based on objective past performance can be a powerful tool to achieve this goal.

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The empirical analysis shows that this cannot be viewed as a success of the issuing technique or as the result of the discretion enjoyed by some Treasuries in the stop-out price setting procedure, but rather as a consequence of the Treasuries bundling the securities auctioned with a number of commodities, such as the syndication rights. Since the overpricing may harm the long-run competitiveness of Treasury auctions by driving the smaller primary dealers out of the primary market, I suggest discontinuing the bundling or exploring alternative auction mechanisms such as the clock auctions, and in particular those which put up different items simultaneously.