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Contracting inside an organization: An experimental study

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Author Info

  • Paul Healy

    ()

  • John Ledyard

    ()

  • Charles Noussair

    ()

  • Harley Thronson

    ()

  • Peter Ulrich

    ()

  • Giulio Varsi

    ()

Abstract

In this paper we propose and test a contracting mechanism, Multi-Contract Cost Sharing (MCCS), for use in the management of a sequence of projects. The mechanism is intended for situations where (1) the contractor knows more about the true costs of various projects than does the contracting agency (adverse selection), and (2) unobservable effort on the part of the contractor may lead to cost reductions (moral hazard). The proposed process is evaluated in an experimental environment that includes the essential economic features of the NASA process for the acquisition of Space Science Strategy missions. The environment is complex and the optimal mechanism is unknown. The design of the MCCS mechanism is based on the optimal contract for a simpler related environment. We compare the performance of the proposed process to theoretical benchmarks and to an implementation of the current NASA ‘cost cap’ procurement process. The data indicate that the proposed MCCS process generates significantly higher value per dollar spent than using cost caps, because it allocates resources more efficiently among projects and provides greater incentives to engage in cost-reducing innovations. Copyright Economic Science Association 2007

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Bibliographic Info

Article provided by Springer in its journal Experimental Economics.

Volume (Year): 10 (2007)
Issue (Month): 2 (June)
Pages: 143-167

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Handle: RePEc:kap:expeco:v:10:y:2007:i:2:p:143-167

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Web page: http://www.springerlink.com/link.asp?id=102888

Related research

Keywords: Mechanism design; Cost sharing; Moral hazard; NASA;

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  1. Ledyard, J.O. & Noussair, C. & Porter, D., 1994. "The Allocation of Shared Resource within an Organization," Purdue University Economics Working Papers 1063, Purdue University, Department of Economics.
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Cited by:
  1. Hans-Theo Normann & Roberto Ricciuti, 2009. "Laboratory Experiments For Economic Policy Making," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 407-432, 07.
  2. Yusufcan Masatlioglu & Sarah Taylor & Neslihan Uler, 2012. "Behavioral mechanism design: evidence from the modified first-price auctions," Review of Economic Design, Springer, vol. 16(2), pages 159-173, September.

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