Incentive Contracting for National Defense: A Problem of Optimal Risk Sharing
AbstractThis paper analyzes risk sharing in defense contracting within an insurance framework with moral hazard present. The positive model specifies conditions under which risk sharing between the firm and the government can be expected to occur, and identifies the important exogenous characteristics of the firm that determine the equilibrium set of contract terms. An important public policy implication is derived from a normative comparison between the simple incentive structure currently used in defense contracting and a modified contingent claims arrangement. The latter is shown to be superior in providing desirable risk sharing, while also maintaining appropriate marginal incentives for cost control.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal Bell Journal of Economics.
Volume (Year): 8 (1977)
Issue (Month): 1 (Spring)
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- Dieter Bös, 1996. "Incomplete Contracting and Target-Cost Pricing," Discussion Paper Serie A 524, University of Bonn, Germany.
- Perez-Castrillo, David & Riedinger, Nicolas, 2004.
"Auditing cost overrun claims,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 54(2), pages 267-285, June.
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