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https://hdl.handle.net/2142/85609
Description
Title
Procurement Contracts and Second Sourcing
Author(s)
Basanes, Carlos Federico
Issue Date
1997
Doctoral Committee Chair(s)
Lanny Arvan
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Theory
Language
eng
Abstract
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.
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