Robustness of simple menus of contracts in cost-based procurement

Daniel Garrett

Games and Economic Behavior, 2014, vol. 87, issue C, 631-641

Abstract: We consider a model of cost-based procurement in which the principal faces Knightian uncertainty about the agent's preferences for cost reduction. We show that a particularly simple incentive scheme—a menu comprising a fixed-price contract and a cost-reimbursement contract—minimizes the maximum expected payment, where this maximum is taken over the set of possible agent preferences. For some parameters of the problem, a range of alternative incentive schemes also satisfy this criterion. We show that the simple incentive scheme is not weakly dominated by any of the alternatives: there does not exist an alternative mechanism for which the expected payment is no higher for all realizations of the agent's preferences and strictly lower for some realization.

Keywords: Cost-based procurement; Simple mechanisms; Minimax (search for similar items in EconPapers)
JEL-codes: C44 H57 L51 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:87:y:2014:i:c:p:631-641

DOI: 10.1016/j.geb.2013.06.004

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