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Risk sharing in procurement

Raymond Deneckere, André de Palma () and Luc Leruth

International Journal of Industrial Organization, 2019, vol. 65, issue C, 173-220

Abstract: We introduce bilateral risk aversion into the mixed adverse selection - moral hazard model of Laffont and Tirole (1986). The presence of exogenous risk interacts with the adverse selection problem in interesting ways. In particular, we show that it is never optimal to present the firm with a fixed price contract, that the efficient firm typically bears more risk than the inefficient firm, and that an increase in exogenous risk may bring about a decrease in expected cost of the project. As a by-product, we also establish that the famous ‘no-distortion-on-the top’ result in adverse selection models relies on risk neutrality of the agent.

Keywords: Regulation; Procurement; Incentives; Risk sharing (search for similar items in EconPapers)
JEL-codes: D86 L32 L51 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:indorg:v:65:y:2019:i:c:p:173-220