Auctioning Incentive Contracts: The Common Cost, Independent Types Case

Fernando Branco

Journal of Regulatory Economics, 1995, vol. 7, issue 3, 277-92

Abstract: Laffont and Tirole (1987) analyzed the problem of a regulator that wants to select one of "n" firms to carry out a single indivisible project when the firms have private and independent costs and have the possibility of an ex-post investment in (non-observable) effort to reduce the (observable) cost. This paper generalizes the analysis to a model of common costs, unknown at the bidding stage, while keeping the assumption of independent types. I show that the main characteristics of the private costs model are kept in a common cost framework. I provide two mechanisms that may be used to implement the optimal contract. Copyright 1995 by Kluwer Academic Publishers

Date: 1995
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