Procurement contracting: efficiency, renegotiation and performance evaluation

Abstract

Renegotiation of long-term contracts can result in inefficiency if it is associated with strategic behavior that reduces the reliability of ex ante agreements. The focus of this paper is on the consequences of opportunistic renegotiation of procurement contracts, and the subsequent performance evaluation, when commitment is limited and information is incomplete or verifiability is limited. Performance data that would indicate efficiency in a complete information setting may indicate inefficiency in an incomplete information setting. Performance evaluation thus should focus on procurement mechanisms that relate the quantity purchased to the possible costs of the supplier.