Optimal Procurement Contracts with Pre–Project Planning

Daniel Krähmer () and Roland Strausz ()
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Daniel Krähmer: University of Bonn

No 303, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: The paper studies procurement contracts with pre–project investigations in the presence of adverse selection and moral hazard. To model the procurer’s problem, we extend a standard sequential screening model to endogenous information acquisition with moral hazard. The optimal contract displays systematic distortions in information acquisition. Due to a rent effect, adverse selection induces too much information acquisition to prevent cost overruns and too little information acquisition to prevent false project cancelations. Moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives. The optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation.

Keywords: Information acquisition; procurement; dynamic mechanism design (search for similar items in EconPapers)
JEL-codes: D82 H57 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-ppm
Date: 2010-01
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Related works:
Journal Article: Optimal Procurement Contracts with Pre-Project Planning (2011)
Working Paper: Optimal Procurement Contracts with Pre--Project Planning (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:trf:wpaper:303

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