Experimental Design
The experiment studies procurement decisions under uncertainty and imperfect verification.
The experiment will be conducted online, using an experimental economics laboratory participant pool. They are invited online at a specific time (with typically 18 or 12 participants). At the beginning of the experiment, participants are then divided into groups. Each group consists of one buyer and five suppliers. The suppliers compete for contracts with the buyer (in each period, the buyer selects three of five suppliers). There are 15 periods of these fixed groups. Each period of the experiment is as follows: The first stage starts with the suppliers who make two consecutive decisions: 1. What actual effort to have, and 2. how much effort to report to the buyer. Regarding decision 1: the higher the supplier’s effort is, the higher the buyer’s payoff, but effort is costly, so it lowers the supplier's payoff. Regarding decision 2: the reported efforts may affect the buyer's decision which supplier to purchase from. In the second stage, an automated audit rule is applied, auditing exactly one firm. After the buyer receives the audit value from one supplier, it decides which 3 of its 5 suppliers to purchase from. After each period, feedback is given in the following way. Suppliers see the reported effort of all suppliers and are informed which one was audited. The buyer receives this information about the actual effort of the audited firm. Each firm is also given feedback on its payoff in the period. There are 15 repeated periods (but where suppliers labels are changed so precise individual reputation cannot be formed). Payoff is determined by 3 random periods selected by the computer at the end of the experiment.
The experiment consists of three treatments, with three different automated audit rules. 1. RAM (“random auditing”, where each message is equally likely to be audited), 2. HMM (“highest-message auditing”, where the highest message is audited). 3. CAM (“competitive auditing”, where a message with higher values is more likely to be audited). Theoretically, under standard equilibrium assumptions, the three audit rules are outcome-equivalent: suppliers pool on the same message, so targeted audit rules become equivalent to random auditing on the equilibrium path. However, the behavior of buyers and suppliers may be affected by different motives, and given the competition among suppliers, the three rules may lead to different performances (actual effort, reported effort, and buyers’ decisions).
Our a priori hypotheses are based on symmetric equilibrium under standard money maximizing assumptions:
H1a: The distribution of suppliers’ effort choices does not differ across the RAM, HMM, and CAM treatments.
H1b: In all treatments, effort choices e_i is low (e_i≤17) because beyond this level the cost a supplier saves by shirking (i.e., effort choice of 0) exceeds the expected rent she loses from being caught and excluded by the audit.
H2a: The distribution of suppliers’ effort reports does not differ across the RAM, HMM, and CAM treatments.
H2b: Suppliers will always report the highest effort (m_i=50) under RAM, HMM, and CAM.
H3: Buyer’s efficiency (measured by buyers’ payoff: which takes into account the suppliers' effort choices and the buyer’s selection decision) does not differ across RAM, HMM, and CAM treatments.