IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v56y2018i5p1417-1452.html
   My bibliography  Save this article

Procurement with Asymmetric Information About Fixed and Variable Costs

Author

Listed:
  • RICK ANTLE
  • PETER BOGETOFT

Abstract

We investigate optimal rationing of resources and organizational slack when a principal procures from an agent with private information about fixed and variable costs. We study the problem in a two‐period setting with persistent types and investigate how the optimal rationing and slack depend on whether production increases or decreases over time. We find that rationing in a dynamic model with persistent types is extra costly, since the types that are eliminated in period 1 might have been attractive in period 2. The cost of rationing increases with the variability of production. If production levels are increasing (decreasing), the principal will be cautious when eliminating types with low variable (fixed) costs in period 1, since these types are particularly profitable in period 2. When production is more stable over time, harsher rationing can be applied in period 1, followed by less harsh rationing, if any, in period 2.

Suggested Citation

  • Rick Antle & Peter Bogetoft, 2018. "Procurement with Asymmetric Information About Fixed and Variable Costs," Journal of Accounting Research, Wiley Blackwell, vol. 56(5), pages 1417-1452, December.
    • Handle: RePEc:bla:joares:v:56:y:2018:i:5:p:1417-1452
    DOI: 10.1111/1475-679X.12236
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.12236
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1475-679X.12236?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, vol. 28(6), pages 604-620, June.
    3. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    4. Emili Grifell-Tatjé & C.A. Knox Lovell & Robin Sickles & Laurens Cherchye & Bram de Rock & Antonio Estache & Marijn Verschelde, 2018. "The Oxford Handbook of Productivity Analysis," Post-Print hal-02573812, HAL.
    5. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    6. Jean Tirole, 2016. "From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection," Econometrica, Econometric Society, vol. 84(4), pages 1291-1343, July.
    7. Rick Antle & Gary D. Eppen, 1985. "Capital Rationing and Organizational Slack in Capital Budgeting," Management Science, INFORMS, vol. 31(2), pages 163-174, February.
    8. Carmen Arguedas & Daan Soest, 2011. "Optimal Conservation Programs, Asymmetric Information and the Role of Fixed Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(2), pages 305-323, October.
    9. William P. Rogerson, 2003. "Simple Menus of Contracts in Cost-Based Procurement and Regulation," American Economic Review, American Economic Association, vol. 93(3), pages 919-926, June.
    10. Harris, Milton & Raviv, Artur, 1996. "The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-1174, September.
    11. Basov, Suren, 2001. "Hamiltonian approach to multi-dimensional screening," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 77-94, September.
    12. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
    13. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    14. Suren Basov, 2002. "A Partial Characterization of the Solution of the Multidimensional Screening Problem with Nonlinear Preferences," Department of Economics - Working Papers Series 860, The University of Melbourne.
    15. William P. Rogerson, 1994. "Economic Incentives and the Defense Procurement Process," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 65-90, Fall.
    16. Antle, R & Fellingham, J, 1990. "Resource Rationing And Organizational Slack In A 2-Period Model," Journal of Accounting Research, Wiley Blackwell, vol. 28(1), pages 1-24.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xun Liu & Sen Lin & Lixing Liu & Fei Qian & Kun Zhang, 2020. "Exploring the Factors Triggering Occupational Ethics Risk of Technology Transaction in Chinese Construction Industry," IJERPH, MDPI, vol. 17(4), pages 1-18, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rick Antle & Peter Bogetoft, 2019. "Mix Stickiness Under Asymmetric Cost Information," Management Science, INFORMS, vol. 67(6), pages 2787-2812, June.
    2. García, Diego, 2014. "Optimal contracts with privately informed agents and active principals," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 695-709.
    3. Braulio Calagua, 2023. "Reducing incentive constraints in bidimensional screening," The Journal of Mechanism and Institution Design, Society for the Promotion of Mechanism and Institution Design, University of York, vol. 8(1), pages 107-150, December.
    4. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    5. Dutta, Sunil & Fan, Qintao, 2012. "Incentives for innovation and centralized versus delegated capital budgeting," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 592-611.
    6. Cheng, Hsing K. & Freimer, Marshall & Richmond, William B. & Sumita, Ushio, 1996. "Optimal allocation and backup of computer resources under asymmetric information and incentive incompatibility," European Journal of Operational Research, Elsevier, vol. 91(2), pages 411-426, June.
    7. Bernardo, Antonio E. & Cai, Hongbin & Luo, Jiang, 2001. "Capital budgeting and compensation with asymmetric information and moral hazard," Journal of Financial Economics, Elsevier, vol. 61(3), pages 311-344, September.
    8. Mitchell A. Farlee & John C. Fellingham & Richard A. Young, 1996. "Properties of Economic Income in a Private Information Setting," Contemporary Accounting Research, John Wiley & Sons, vol. 13(2), pages 401-422, September.
    9. Peter Bogetoft, 2000. "DEA and Activity Planning under Asymmetric Information," Journal of Productivity Analysis, Springer, vol. 13(1), pages 7-48, January.
    10. Rick Antle & Peter Bogetoft & Andrew W. Stark, 1999. "Selection from Many Investments with Managerial Private Information," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 397-418, September.
    11. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    12. Eugenio J. Miravete, 2001. "Screening Through Bundling," Penn CARESS Working Papers 3b8e0b3847b08b90e8570987c, Penn Economics Department.
    13. Ludovic Renou, 2003. "A Didactic Example of Linear (Multidimensional) Screening Contracts," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 2(3), pages 245-261, December.
    14. Ana Pinto Borges & João Correia‐Da‐Silva, 2011. "Using Cost Observation To Regulate A Manager Who Has A Preference For Empire‐Building," Manchester School, University of Manchester, vol. 79(1), pages 29-44, January.
    15. Kim, Doyoung, 2006. "Capital budgeting for new projects: On the role of auditing in information acquisition," Journal of Accounting and Economics, Elsevier, vol. 41(3), pages 257-270, September.
    16. Nolan Miller & Alexander Wagner & Richard Zeckhauser, 2013. "Solomonic separation: Risk decisions as productivity indicators," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 265-297, June.
    17. Jeffrey A. Yost, 1993. "Costly Communication and Delegation in Multiple‐Division Firms," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 2(4), pages 305-317, December.
    18. Sunil Dutta & Stefan Reichelstein, 2000. "Controlling Investment Decisions: Hurdle Rates and Intertemporal Cost Allocation," CESifo Working Paper Series 354, CESifo.
    19. Meng, Dawen & Tian, Guoqiang, 2013. "Multi-task incentive contract and performance measurement with multidimensional types," Games and Economic Behavior, Elsevier, vol. 77(1), pages 377-404.
    20. Stoughton, Neal M. & Zechner, Josef, 2007. "Optimal capital allocation using RAROC(TM) and EVA(R)," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 312-342, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:56:y:2018:i:5:p:1417-1452. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.