Moral Hazard, Incentive Contracts and Risk: Evidence from Procurement

Gregory Lewis and Patrick Bajari

No 17647, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Deadlines and penalties are widely used to incentivize effort. We model how these incentive contracts affect the work rate and time taken in a procurement setting, characterizing the efficient contract design. Using new micro-level data on Minnesota highway construction contracts that includes day-by-day information on work plans, hours actually worked and delays, we find evidence of moral hazard. As an application, we build an econometric model that endogenizes the work rate, and simulate how different incentive structures affect outcomes and the variance of contractor payments. Accounting for the traffic delays caused by construction, switching to a more efficient design would substantially increase welfare without substantially increasing the risk borne by contractors.

JEL-codes: D86 H57 L92 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cta and nep-ppm
Note: IO LE PE
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Citations: View citations in EconPapers (4)

Published as Moral Hazard, Incentive Contracts, and Risk: Evidence from Procurement Gregory Lewis Harvard University and NBER Patrick Bajari Review of Economic Studies (2014) 81 (3): 1201-1228.

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Journal Article: Moral Hazard, Incentive Contracts, and Risk: Evidence from Procurement (2014)
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