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Optimal Procurement Contracts with Pre--Project Planning

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Author Info
Daniel Krämer ()
Roland Strausz ()

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Abstract

The paper studies procurement contracts with pre--project investigations under hidden information and hidden action. The principal generally benefits from inducing the agent to conduct pre--project investigations to avoid cost overruns and false project cancelations. Due to a rent effect, hidden information leads to systematic distortions in information acquisition: the agent acquires too much information to prevent cost overruns and too little information to prevent false project cancelations. The optimal mechanism is a menu of option contracts which exhibit a costly quitting option. They achieve the dual goal of providing incentives for information acquisition and truthful information revelation.

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Paper provided by Departmental Working Papers in its series Papers with number 036.

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Date of creation: 23 Jan 2009
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Handle: RePEc:bef:lsbest:036

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Related research
Keywords: Information acquisition; procurement; screening; implementation errors;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  4. Myerson, Roger B, 1986. "Multistage Games with Communication," Econometrica, Econometric Society, vol. 54(2), pages 323-58, March. [Downloadable!] (restricted)
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  5. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Blackwell Publishing, vol. 57(4), pages 597-625, October. [Downloadable!] (restricted)
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  6. Anke Kessler, 1998. "The Value of Ignorance," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 339-354, Summer. [Downloadable!] (restricted)
  7. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and compliance strategies," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 85-125, October. [Downloadable!] (restricted)
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  8. Courty, Pascal & Li, Hao, 2000. "Sequential Screening," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 697-717, October.
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  9. Marco Battaglini, 2005. "Long-Term Contracting with Markovian Consumers," American Economic Review, American Economic Association, vol. 95(3), pages 637-658, June. [Downloadable!]
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  10. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302. [Downloadable!] (restricted)
  11. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-78, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Reiche, S., 2008. "Sequential Screening and Renegotiation," Cambridge Working Papers in Economics 0820, Faculty of Economics, University of Cambridge. [Downloadable!]
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