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18 - Designing reputation mechanisms

Published online by Cambridge University Press:  04 November 2009

Chrysanthos Dellarocas
Affiliation:
Professor of Information Systems, University of Maryland, USA
Federico Dini
Affiliation:
Junior Economist, CONSIP Research Unit, Italy
Giancarlo Spagnolo
Affiliation:
Head of the Research Unit at Consip, Italy: Visiting Associate Professor, Stockholm School of Economics
Nicola Dimitri
Affiliation:
Università degli Studi, Siena
Gustavo Piga
Affiliation:
Università degli Studi di Roma 'Tor Vergata'
Giancarlo Spagnolo
Affiliation:
Stockholm School of Economics
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Summary

Introduction

A common problem in procurement is the presence of relevant aspects of an exchange that cannot be fully specified in an explicit contract, because for example they are not verifiable by a third party (like a court or an arbitrator) at reasonable cost. Non-contractibility opens the door to two well-known forms of opportunism: ‘ex-ante’ and ‘post-contracting’ opportunism. Ex-ante opportunism takes place at the supplier selection stage, when the valuation of a good or service by the buyer depends on some unobservable characteristics of the seller or the good/service it provides. This often results in an undesirable matching between buyers and sellers, that is, in situations where a buyer may end up interacting with a seller (or buying a good) that does not have the desired characteristics (e.g., quality), even though sellers (goods) with the desired characteristics are present in the market. Post-contracting opportunism refers to possible opportunistic behaviour of one trading party during the procurement transaction that reduces the welfare of the other; for example, a contractor or a seller who, after having been selected, reduces below the level agreed upon the quality of service (or the effort exerted) on those aspects of the supplied good/service that are difficult or costly to monitor.

Appropriate explicit incentive contracts can partly overcome these informational problems when indicators correlated to the non-contractible features exist. Procured goods and services often present important qualitative aspects that are difficult to specify and enforce contractually and buyers have limited contractual tools to control opportunism.

Type
Chapter
Information
Handbook of Procurement , pp. 446 - 482
Publisher: Cambridge University Press
Print publication year: 2006

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