Scandinavian Working Papers in Economics

SITE Working Paper Series,
Stockholm School of Economics, Stockholm Institute of Transition Economics

No 21: Reputation and Entry

Jeffrey Butler (), Enrica Carbone (), Pierluigi Conzo () and Giancarlo Spagnolo ()
Additional contact information
Jeffrey Butler: Einaudi Institute for Economics and Finance, Postal: Einaudi Institute for Economics and Finance, Via Sallustiana 62, 00187 Roma, Italy
Enrica Carbone: University of Naples "SUN"
Pierluigi Conzo: University of Turin, Department of Economics, Postal: University of Turin, Department of Economics, Via Po 53, 10124 Torino, Italy
Giancarlo Spagnolo: Stockholm Institute of Transition Economics, Postal: Stockholm Institute of Transition Economics, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, so that the concern is warranted, appropriately designed reputation mechanisms actually stimulate entry. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains for the buyer.

Keywords: Entry; Feedback mechanisms; Governance; Incomplete contracts; Limited enforcement; Incumbency; Multidimensional competition; Participation; Past performance; Procurement; Quality; Reputation; Vendor rating

JEL-codes: H57; L14; L15

50 pages, November 25, 2012

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