Free Riding in Procurement Design

Klenio Barbosa

No 09-128, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Low-powered contracts do not provide proper incentives to reduce cost; still empirical studies show that they are quite pervasive in public and private procurement. This paper argues that low-powered contracts arise due to a free-riding problem when the contractor enjoys economies of scale/scope working for different buyers. A buyer, offering a procurement contract to the contractor, does not fully internalize that higher-powered incentives provide cost reduction in the contractor's activities, benefiting other buyers. As a result, buyers offer lower-powered contracts than what would be designed by cooperative buyers. Strikingly, the higher the contractor's benefits from economies of scope/scale are, the lower the power of the procurement contracts will be. In addition, laws which force buyers to award fixed-price contracts can be welfare-enhancing.

Keywords: free-riding; procurement; multibuyers (search for similar items in EconPapers)
JEL-codes: H57 L24 (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-mic and nep-pub
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Related works:
Working Paper: FREE-RIDING IN PROCUREMENT DESIGN (2016)
Working Paper: Free-Riding in Procurement Design (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:22251

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