Optimal Procurement Contract with Cost Overruns

Lionel Thomas ()
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Lionel Thomas: CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE]

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Abstract: This paper studies the optimal procurement contract in the presence of potential cost overruns. The firm s delivery cost depends on its efficiency-type, which is private information. The delivery cost can take two values: planned or overrun. The lack of cost overruns is considered to be a noisy signal of the firm s effort to properly manage the project. The firm is protected by limited liability. Faced with adverse selection, then moral hazard, we show that the buyer offers a fully pooling incentive scheme to the firm. Moreover, the incentive compensation scheme can be implemented by a pair of fixed-price contracts.

Date: 2019
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Published in Annals of Economics and Statistics, 2019, 133, pp.109. ⟨10.15609/annaeconstat2009.133.0109⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04526536

DOI: 10.15609/annaeconstat2009.133.0109

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