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Procurement Policy and Contracting Efficiency

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  • Bower, Anthony G

Abstract

The contracting literature has emphasized the optimality of using certain contracting instruments, such as multiple cost observations, full commitment, self-selection, and competition. A two-period procurement model is constructed incorporating all of the instruments and optimal contracts are characterized. Numerical examples suggest that the marginal benefits of full commitment, self-selection, and multiple cost observations are small, while the benefits of competition are larger. To obtain some evidence on contracting costs, defense contracting is reviewed. It indicates that using these instruments is very costly, thus calling into question the optimality of using all of the procurement instruments. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Bower, Anthony G, 1993. "Procurement Policy and Contracting Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 873-901, November.
  • Handle: RePEc:ier:iecrev:v:34:y:1993:i:4:p:873-901
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    Cited by:

    1. Fuqiang Zhang, 2010. "Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 608-626, August.
    2. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    3. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    4. Leon Yang Chu & David E.M. Sappington, 2009. "Implementing high-powered contracts to motivate intertemporal effort supply," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 296-316.
    5. Leon Yang Chu & David E. M. Sappington, 2007. "Simple Cost-Sharing Contracts," American Economic Review, American Economic Association, vol. 97(1), pages 419-428, March.
    6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    7. 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.
    8. Kopsakangas-Savolainen, Maria & Svento, Rauli, 2010. "Comparing welfare effects of different regulation schemes: An application to the electricity distribution industry," Energy Policy, Elsevier, vol. 38(11), pages 7370-7377, November.
    9. repec:hal:psewpa:hal-00710639 is not listed on IDEAS

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