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Optimal Procurement Contracts with Pre--Project Planning

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  • Daniel Kr�mer

    ()

  • Roland Strausz

    ()

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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Bibliographic Info

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;

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References

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  1. Laffont, J.J. & Tirole, J., 1995. "Pollution Permits and Compliance Strategies," Papers 95.395, Toulouse - GREMAQ.
  2. 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.
  3. Pascal Courty & Li Hao, 1997. "Sequential screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Jean-Jacques LAFFONT & Jean TIROLE, 1990. "Adverse Selection and Renegotiation in Procurement," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9005, Université de Lausanne, Faculté des HEC, DEEP.
  6. 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.
  7. Marco Battaglini, 2005. "Long-Term Contracting with Markovian Consumers," American Economic Review, American Economic Association, vol. 95(3), pages 637-658, June.
  8. Roger B. Myerson, 1984. "Multistage Games with Communication," Discussion Papers 590, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  10. Crémer, Jacques & Khalil, Fahad, 1991. "Gathering Information before Signing a Contract," IDEI Working Papers 5, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
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Citations

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Cited by:
  1. 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.
  2. Rahul Deb & Maher Said, 2013. "Dynamic Screening with Limited Commitment," Working Papers tecipa-485, University of Toronto, Department of Economics.
  3. Guillaume Roger, 2011. "Optimal contract under moral hazard with soft information," Discussion Papers 2012-12, School of Economics, The University of New South Wales.
  4. Reiche, S., 2008. "Sequential Screening and Renegotiation," Cambridge Working Papers in Economics 0820, Faculty of Economics, University of Cambridge.
  5. Hoffmann, Florian & Inderst, Roman, 2011. "Pre-sale information," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2333-2355.

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