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Monitoring of Performance in Organizational Contracting: The Case of Defense Procurement

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  • Baron, David P
  • Besanko, David

Abstract

This paper contains an agency-theoretic analysis of procurement contracts in which the govr nment designs optimal linear contracts for a risk-averse supplier in the presence of moral hazard, private information, and imperfect monitoring. Optimal contracts deviate from first-best risk sharing. The direction of the deviation depends on t he relative severity of the moral hazard and private information problem s and on the precision of the monitor. In contrast to the usual result in the moral hazard literature, the government may, in some cases, prefer that the effort of the supplier be taxed. Choice of the precision of the monitor and the categories of costs covered by the monitor are also studied. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 90 (1988)
Issue (Month): 3 ()
Pages: 329-56

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Handle: RePEc:bla:scandj:v:90:y:1988:i:3:p:329-56

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Faynzilberg, Peter S. & Kumar, Praveen, 1997. "Optimal Contracting of Separable Production Technologies," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 15-39, October.
  2. Lichtenberg, F.R., 1988. "How Elastic Is The Government'S Demand For Weapons?," Papers fb-_88-39, Columbia - Graduate School of Business.
  3. Evans, Shane, 2010. "Menus of linear contracts in procurement with type-dependent reservation utility," Working Papers 10280, University of Tasmania, School of Economics and Finance, revised 05 Oct 2010.
  4. Dominique Demougin & Claude Fluet, 1997. "Monitoring versus Incentives: Substitutes or Complements?," Cahiers de recherche CREFE / CREFE Working Papers 47, CREFE, Université du Québec à Montréal.
  5. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
  6. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.

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