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Contracting inside an organization: An experimental study

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  • Ledyard, J.
  • Noussair, C.N.

    (Tilburg University)

  • Thronson, H.
  • Ulrich, P.
  • Varsi, G.
  • Healy, P.

Abstract

In this paper we propose and test a contracting mechanism, Multi-Contract Cost Sharing (MCCS), for use in the management of a sequence of projects. The mechanism is intended for situations where (1) the contractor knows more about the true costs of various projects than does the contracting agency (adverse selection), and (2) unobservable effort on the part of the contractor may lead to cost reductions (moral hazard). The proposed process is evaluated in an experimental environment that includes the essential economic features of the NASA process for the acquisition of Space Science Strategy missions. The environment is complex and the optimal mechanism is unknown. The design of the MCCS mechanism is based on the optimal contract for a simpler related environment. We compare the performance of the proposed process to theoretical benchmarks and to an implementation of the current NASA ‘cost cap’ procurement process. The data indicate that the proposed MCCS process generates significantly higher value per dollar spent than using cost caps, because it allocates resources more efficiently among projects and provides greater incentives to engage in cost-reducing innovations. Copyright Economic Science Association 2007

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-194861.

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Date of creation: 2007
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Publication status: Published in Experimental Economics (2007) v.10, p.143-167
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-194861

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Web page: http://www.tilburguniversity.edu/

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  1. Ledyard, J.O. & Noussair, C. & Porter, D., 1994. "The Allocation of Shared Resource within an Organization," Purdue University Economics Working Papers 1063, Purdue University, Department of Economics.
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  3. Noussair, C.N. & Porter, D., 1992. "Allocating priority with auctions: An experimental analysis," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-381124, Tilburg University.
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  17. John Ledyard & David Porter & Randii Wessen, 2000. "A Market-Based Mechanism for Allocating Space Shuttle Secondary Payload Priority," Experimental Economics, Springer, Springer, vol. 2(3), pages 173-195, March.
  18. Banks, Jeffrey S. & Ledyard, John O. & Porter, David P., . "Allocating Uncertain and Unresponsive Resources," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 680, California Institute of Technology, Division of the Humanities and Social Sciences.
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Cited by:
  1. Yusufcan Masatlioglu & Sarah Taylor & Neslihan Uler, 2012. "Behavioral mechanism design: evidence from the modified first-price auctions," Review of Economic Design, Springer, Springer, vol. 16(2), pages 159-173, September.
  2. Hans-Theo Normann & Roberto Ricciuti, 2009. "Laboratory Experiments For Economic Policy Making," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 23(3), pages 407-432, 07.

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