A Simple Numerical Evaluation of the Incentive Contracts for Japan’s Defense Equipment

Motohiko Kasai and Naoki Watanabe ()
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Motohiko Kasai: Ministry of Defense, Japan
Naoki Watanabe: Keio University

The Review of Socionetwork Strategies, 2021, vol. 15, issue 2, 575-596

Abstract: Abstract The aim of this study is to numerically evaluate the performance of three schemes in incentive contracts used by the Japan Ministry of Defense for its procurement of defense equipment: Two schemes that had previously been used and one scheme that is currently being used. We formalized the transaction between the Ministry of Defense and a supplier as a principal-agent model and compared the effectiveness of providing an incentive for the supplier to exert effort for its cost reduction to the benefit of the general public in Japan. In a simple numerical study, we specified the probability distribution of the amount of cost reduction per unit and fixed the effort level so that we could interpret whether the supplier chooses to exert effort or not on cost reduction. As a result, it was found that changes in the schemes that have been made did not clearly improve the welfare of the general public and that the incentive scheme currently being used is always the best one among those three schemes.

Keywords: Defense equipment contract; Principal-agent analysis; Cost reduction; Public welfare; Numerical evaluation (search for similar items in EconPapers)
JEL-codes: D04 D86 L51 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s12626-021-00090-9

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