Optimal Procurement Contracts with Pre-Project Planning

Daniel Krähmer and Roland Strausz

The Review of Economic Studies, 2011, vol. 78, issue 3, 1015-1041

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 cancellations. 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. Copyright 2011, Oxford University Press.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (53)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdq033 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Optimal Procurement Contracts with Pre--Project Planning (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:78:y:2011:i:3:p:1015-1041

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().