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Holdups, Quality Choice, and the Achilles' Heel in Government Contracting

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Author Info

  • Dieter Bös
  • Christoph Lülfesmann

Abstract

This paper investigates a procurement relationship between a welfare-oriented government and a private supplier. The agents face several versions of the trading good which differ in quality and production costs, and the differences between those items are undescribable ex ante. In presence of this `quality-choice problem', no initial contract may induce efficient cost-reducing investments of the supplier. In contrast, a first-best result is always attainable in private procurement where the buyer maximizes profit rather than welfare. We identify the government's welfare objective as its Achilles' heel: equilibrium trade prices differ in public and private procurement, and private governance can lead to more efficient investment decisions even though renegotiation ensures the ex-post efficient trade decision in either regime.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse28_2001.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse28_2001.

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Length: 35
Date of creation: Aug 2001
Date of revision:
Handle: RePEc:bon:bonedp:bgse28_2001

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Procurement; Incomplete Contracts; Quality Choice; Governance Structure;

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References

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  16. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
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