The Signaling and Incentive Effects of Supplier Awards



Many firms recognise the importance of supplier performance by giving out a “Supplier of the Year" award to reward their suppliers' efforts. These awards are usually symbolic since they have no tangible value attached to them for the recipient. If suppliers care about receiving these awards, they may have motivational effects and result in higher provision of quality. Additionally, since they are costless, they may result in higher transaction efficiency. On the other hand, giving out an award to a supplier gives a signal to other buyers that this supplier is good, intensifying the competition to get the good supplier. We show, both theoretically and experimentally the existence of these two contrary effects. We find that private symbolic awards have incentive effects and lead to higher provision of quality and higher buyer's profits. When the awards are public this profit premium disappears. This happens for two reasons, first because making the award public crowds out the intrinsic value of the award for suppliers, and second because buyers have to pay higher prices to get the good suppliers. We also find that significant efficiency gains occur only when the award is private and the quality is public. This suggests that symbolic awards provide a noisy signal of the supplier's type and therefore fail to fully capture the potential efficiency gains of complete transparent transactions.