Tradeoff between Equity and Effciency in Revenue Sharing Contracts
AbstractWe investigate the problem of setting revenue sharing rules in a team production environment with a principal and two agents. We assume that the project output is binary and that the principal can observe the level of agents' actual effort, but does not know the production function. Identifying conditions that ensure the eficiency of the revenue sharing rule, we show that the rule of equal percentage markups can lead to inflation of project costs. This result provides an explanation for project cost overruns other than untruthful cost reporting.
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Bibliographic InfoArticle provided by CEJEME in its journal Central European Journal of Economic Modelling and Econometrics.
Volume (Year): 2 (2010)
Issue (Month): 1 (January)
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Web page: http://cejeme.org/
Moral Hazard; Team Production; Cost Inflation; Project Management;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
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