Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration

Abstract

Due to technological progress, recent performance is often more informative about future performance prospects than is older performance. We incorporate information decay in a career concern model in which performance depends on type and effort and contract renewal is based on the performance record.In contrast with the career concern literature (e.g. Lewis, 1986; RJE), contractors work harder when the project approaches renewal date and when their reputation is better. Productive investment are crowded out by window-dressing effort in late contract periods, but it is boosted in early periods. More frequent contract renewals strengthen reputational effects and result in improved performance if the relative cost of investment is low, but otherwise long-term contracts induce more effort.Our results are corroborated by some empirical studies showing that performance improves as the contract approaches renewal date.

Public procurement with unverifiable quality: The case for discriminatory competitive procedures

“…First, all combinations of the handicap and the discount factor that meet the conditions stated in Proposition 1 are able to sustain an equilibrium; this implies that, if we interpret the discount factor as a parameter depending on the frequency of interactions -which is one of the buyer's decisions in real procurement markets -the buyer has the ability to substitute between the two instruments of the handicap and the frequency of interactions. This result is rather standard in the repeated game literature (see Shapiro, 1983, but also, more recently, Iossa and Rey, 2014). Notice, however, that in our model, since neither firm is ever handicapped along the equilibrium path, the buyer does not have an incentive to exploit this substitutability.…”

Contract Renewal as an Incentive Device. An Application to the French Urban Public Transport Sector

“…In such a situation, rival firms might be deterred from making counter-offers and the incumbent's renewal is likely. 8 On the other hand, the discretion left to the local government implies that the reputation of the contractor in place might be important in the decision to renew a contract (Iossa and Rey, 2009). Thus, even if competition is limited, better performances may substantially increase the renewal probability of the contractor and provide incentives for the firm.…”

“…if the firm operates under a cost -plus contract p GC −c(t) − ψ(a(t)) if the firm operates under a gross cost contract At the expiration of the initial contract (at time T), a new contract 9 starts and the perspective of contract renewal may be an important source of incentives for the incumbent firm. Indeed, the role of contract renewal as an incentive device has long been recognized (Laffont and Tirole, 1993;Dalen et al 2006;Iossa and Rey, 2009). 10 In this paper, we assume that the decision of being renewed (or not) at T depends on the last period cost c(T ).…”

Innovation and regulatory outcomes: evidence from the public-private contracts for water supply in France

“…Theoretical and empirical studies in contract theory also point out a possible increase in the performance of franchise bidding agreements before contract's renewal, suggesting that opportunism may decrease over time (Rey andIossa 2010, Yvrande-Billon andGautier 2008). A first reason advanced by the literature to explain this result is that because of bounded rationality problems (limited memory, myopia), public authorities may forget or forgive bad past behaviours and then, they may rather focus on recent performances to decide to renew the incumbent or not.…”

“…However, they fail to determine whether the investments realized are really specific and aim to create a "lock-in" or if they merely represent a signal sent by incumbent operators to the regulator in order to prove their commitment and then, to enhance their chance to be awarded the subsequent franchise. Theoretical and empirical studies in contract theory also point out a possible increase in the performance of franchise bidding agreements before contract's renewal (Yvrande-Billon and Gautier, 2008;Rey and Iossa, 2010). Whether this time constraint can mitigate or exacerbate the impact of asset specificity on reputational behaviours remains an open question.…”