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Pairing provision price and default remedy: optimal two‐stage procurement with private R&D efficiency

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  • Bin Liu
  • Jingfeng Lu

Abstract

This article studies cost‐minimizing two‐stage procurement with Research and Development (R&D). The principal wishes to procure a product from an agent. At the first stage, the agent can conduct R&D to discover a more cost‐efficient production technology. First‐stage R&D efficiency and effort and the realized second‐stage production cost are the agent's private information. The optimal two‐stage mechanism is implemented by a menu of single‐stage contracts, each specifying a fixed provision price and remedy paid by a defaulting agent. A higher delivery price is paired with a higher default remedy, and a more efficient type opts for a higher price and higher remedy.

Suggested Citation

  • Bin Liu & Jingfeng Lu, 2018. "Pairing provision price and default remedy: optimal two‐stage procurement with private R&D efficiency," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 619-655, September.
    • Handle: RePEc:bla:randje:v:49:y:2018:i:3:p:619-655
    DOI: 10.1111/1756-2171.12247
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    Cited by:

    1. Huiyi Guo & Wei He & Bin Liu, 2022. "Learning by Consuming: Optimal Pricing with Endogenous Information Provision," Papers 2209.01453, arXiv.org.
    2. Vivek Bhattacharya, 2021. "An Empirical Model of R&D Procurement Contests: An Analysis of the DOD SBIR Program," Econometrica, Econometric Society, vol. 89(5), pages 2189-2224, September.
    3. Lu, Jingfeng & Wang, Zijia, 2021. "Optimal selling mechanisms with buyer price search," Journal of Economic Theory, Elsevier, vol. 196(C).
    4. Meng, Dawen & Sun, Lei & Tian, Guoqiang, 2022. "Dynamic mechanism design on social networks," Games and Economic Behavior, Elsevier, vol. 131(C), pages 84-120.
    5. Lee, Jun Gon & Park, Min Jae, 2020. "Evaluation of technological competence and operations efficiency in the defense industry: The strategic planning of South Korea," Evaluation and Program Planning, Elsevier, vol. 79(C).

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