Menus of linear contracts in procurement with type-dependent reservation utility

Shane Evans ()
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Shane Evans: School of Economics and Finance, University of Tasmania, http://www.utas.edu.au/economics-finance/

No 10280, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper examines the influence of type-dependent reservation utility on the optimality of linear contracts in a Principal-Agent model of procurement. Type-dependency of reservation utility, combined with the requirements of individual rationality and incentive compatibility in the principal's contracts induces a countervailing incentive effect, the strength of which depends on an index of quality or degree of competition that the agent would face in an external private market. The results show how the curvature of the reservation utility dictates whether the optimal contracts can be implemented with a menu of linear contracts, and how the magnitude of the private market index influences the net-transfer rule.

Keywords: Linear Contracts; Countervailing Incentives; Type Dependent Reservation Utility (search for similar items in EconPapers)
JEL-codes: D82 D86 H57 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-10-05, Revised 2010-10-05
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Published by the University of Tasmania. Discussion paper 2010-09

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