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Optimal monitoring in dynamic procurement contracts

Andreas Asseyer ()
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Andreas Asseyer: Humboldt-Universitaet zu Berlin

No 2015002, Working Papers from Berlin Doctoral Program in Economics and Management Science (BDPEMS)

Abstract: Which information should government authorities monitor when they procure goods from private suppliers? I analyze this question in a principal-agent model of procurement with moral hazard concerning cost-reducing investments and dynamic adverse selection about investment cost and a production cost shock. The principal can monitor the investment, the shock, or both at a cost. I show that it is never optimal to monitor investment and shock. Monitoring investment is always at least as effective as monitoring the shock. The two instruments are equivalent if the level of investment cost is high. Monitoring may decrease efficiency in the optimal contract.

Keywords: procurement; monitoring; dynamic contracts (search for similar items in EconPapers)
JEL-codes: D82 D86 H57 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-mic and nep-reg
Date: 2015-06-17
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