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Optimal Procurement Contracts with Pre-Project Planning

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  • Daniel Krähmer
  • Roland Strausz

Abstract

The paper studies procurement contracts with pre-project investigations in the presence of adverse selection and moral hazard. To model the procurer's problem, we extend a standard sequential screening model to endogenous information acquisition with moral hazard. The optimal contract displays systematic distortions in information acquisition. Due to a rent effect, adverse selection induces too much information acquisition to prevent cost overruns and too little information acquisition to prevent false project cancellations. Moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives. The optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rdq033
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 3 ()
Pages: 1015-1041

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Handle: RePEc:oup:restud:v:78:y:2011:i:3:p:1015-1041

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  1. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-78, June.
  2. Laffont, J.J. & Tirole, J., 1995. "Pollution Permits and Compliance Strategies," Papers 95.395, Toulouse - GREMAQ.
  3. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  4. Pascal Courty & Li Hao, 1997. "Sequential screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Marco Battaglini, 2003. "Long-Term Contracting with Markovian Consumers," Theory workshop papers 505798000000000048, UCLA Department of Economics.
  6. Roger B. Myerson, 1984. "Multistage Games with Communication," Discussion Papers 590, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Khalil, F & Rochet, J-C, 1997. "Strategic Information Gathering Before a Contract is Offered," Discussion Papers in Economics at the University of Washington 97-15, Department of Economics at the University of Washington.
  8. Laffont, Jean-Jacques & Tirole, Jean., 1988. "Adverse Selection and Renegotiation in Procurement," Working Papers 665, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  10. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  11. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
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Citations

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Cited by:
  1. Guillaume Roger, 2013. "Optimal Contract under Moral Hazard with Soft Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 55-80, November.
  2. Krähmer, Daniel & Strausz, Roland, 2014. "Ex post information rents in sequential screening," CEPR Discussion Papers 9927, C.E.P.R. Discussion Papers.
  3. Krähmer, Daniel & Strausz, Roland, 2011. "The Benefits of Sequential Screening," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 363, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Mark Armstrong & Jidong Zhou, 2013. "Search Deterrence," Economics Series Working Papers 661, University of Oxford, Department of Economics.
  5. Krähmer, Daniel & Strausz, Roland, 2013. "Ex post information rents and disclosure in sequential screening," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 406, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Laura Doval, 2013. "Whether or not to open Pandora's box," Discussion Papers 1574, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Terstiege, Stefan, 2013. "Precontractual Investigation and Sequential Screening," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 429, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. Rahul Deb & Maher Said, 2013. "Dynamic Screening with Limited Commitment," Working Papers tecipa-485, University of Toronto, Department of Economics.
  9. Hoffmann, Florian & Inderst, Roman, 2011. "Pre-sale information," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2333-2355.
  10. Terstiege, Stefan, 2012. "Endogenous information and stochastic contracts," Games and Economic Behavior, Elsevier, vol. 76(2), pages 535-547.
  11. Kovác, Eugen & Krähmer, Daniel, 2013. "Optimal Sequential Delegation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 427, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  12. Reiche, S., 2008. "Sequential Screening and Renegotiation," Cambridge Working Papers in Economics 0820, Faculty of Economics, University of Cambridge.

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