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Menus of linear contracts in procurement with type-dependent reservation utility

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    Abstract

    This paper examines the influence of type-dependent reservation utility on the optimality of linear contracts in a Principal-Agent model of procurement. Type-dependency of reservation utility, combined with the requirements of individual rationality and incentive compatibility in the principal's contracts induces a countervailing incentive effect, the strength of which depends on an index of quality or degree of competition that the agent would face in an external private market. The results show how the curvature of the reservation utility dictates whether the optimal contracts can be implemented with a menu of linear contracts, and how the magnitude of the private market index influences the net-transfer rule.

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    File URL: http://eprints.utas.edu.au/10280/1/DP2010-09_Evans_Procurement_Oct_2010.pdf
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    Bibliographic Info

    Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 10280.

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    Length: 40 pages
    Date of creation: 05 Oct 2010
    Date of revision: 05 Oct 2010
    Publication status: Published by the University of Tasmania. Discussion paper 2010-09
    Handle: RePEc:tas:wpaper:10280

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    Related research

    Keywords: Linear Contracts; Countervailing Incentives; Type Dependent Reservation Utility;

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    1. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
    3. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    4. Antonio Acconcia & Riccardo Martina & Salvatore Piccolo, 2005. "Vertical Restraints under Asymmetric Information: On the Role of Participation Constraints," CSEF Working Papers 141, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jan 2007.
    5. Leonard, Daniel, 1987. "Co-state variables correctly value stocks at each instant A proof," Journal of Economic Dynamics and Control, Elsevier, vol. 11(1), pages 117-122, March.
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    7. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
    8. Baron, David P & Besanko, David, 1988. " Monitoring of Performance in Organizational Contracting: The Case of Defense Procurement," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 329-56.
    9. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, December.
    10. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    11. William P. Rogerson, 1987. "On the Optimality of Menus of Linear Contracts," Discussion Papers 714, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    12. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
    13. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    14. William P. Rogerson, 2003. "Simple Menus of Contracts in Cost-Based Procurement and Regulation," American Economic Review, American Economic Association, vol. 93(3), pages 919-926, June.
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