IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v33y1987i11p1481-1488.html
   My bibliography  Save this article

On Optimal Competitive Contracting

Author

Listed:
  • Richard Engelbrecht-Wiggans

    (Department of Business Administration, University of Illinois, Champaign, Illinois 61820)

Abstract

We present an example of risk neutral bid-taker and bidders in which the bid-taker obtains a greater expected revenue from auctioning an inefficient contract than from auctioning an efficient contract. This occurs because in going from the efficient contract to an inefficient (but almost efficient) contract, the winning bidder's expected profit decreases faster than the value of the output produced under the contract (net of production costs) decreases. Therefore, the bid-taker's expected revenue---the value of the output less the winning bidder's expected profit---increases. The competitive letting of a contract introduces a factor not present when somehow letting a contract noncompetitively. In particular, changing the contract not only affects the efficiency of the contract, but also affects the amount of the contract's value that will be captured by the contract winner as profit. Therefore, for competitively let contracts, the optimal contract for the bid-taker to offer turns out less efficient than can be explained solely by any benefits from risk sharing.

Suggested Citation

  • Richard Engelbrecht-Wiggans, 1987. "On Optimal Competitive Contracting," Management Science, INFORMS, vol. 33(11), pages 1481-1488, November.
    • Handle: RePEc:inm:ormnsc:v:33:y:1987:i:11:p:1481-1488
    DOI: 10.1287/mnsc.33.11.1481
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.33.11.1481
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.33.11.1481?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pennings, Joost M.E. & Egelkraut, Thorsten M., 2005. "Why Do Commodity Futures Markets Exist? Their Role in Managing Marketing Channel Relationships," 2005 Annual meeting, July 24-27, Providence, RI 19433, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Pennings, Joost M.E. & Wansink, Brian & Hoffmann, Arvid O.I., 2011. "A marketing-finance approach linking contracts in agricultural channels to shareholder value," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114785, European Association of Agricultural Economists.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:33:y:1987:i:11:p:1481-1488. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.