Optimal Procurement Contracts with Pre--Project Planning

Daniel Krämer () and Roland Strausz

Departmental Working Papers

Abstract: The paper studies procurement contracts with pre--project investigations under hidden information and hidden action. The principal generally benefits from inducing the agent to conduct pre--project investigations to avoid cost overruns and false project cancelations. Due to a rent effect, hidden information leads to systematic distortions in information acquisition: the agent acquires too much information to prevent cost overruns and too little information to prevent false project cancelations. The optimal mechanism is a menu of option contracts which exhibit a costly quitting option. They achieve the dual goal of providing incentives for information acquisition and truthful information revelation.

Keywords: Information acquisition; procurement; screening; implementation errors (search for similar items in EconPapers)
JEL-codes: D82 H57 (search for similar items in EconPapers)
Date: 2009-01-23
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Citations: View citations in EconPapers (4)

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Journal Article: Optimal Procurement Contracts with Pre-Project Planning (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bef:lsbest:036

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