Optimal Procurement Contracts under a Binding Budget Constraint
The traditional literature on agency models predicts that, for zero liability contracts, it is optimal for the principal to pay for the information he cannot observe. However, this principle is not valid for a set of contracts mostly used by government agencies whose distinguishing feature is represented by a stringent budget constraint for the principal. This paper shows that in this environment the principal will either choose a structure exhibiting pooling or a bargaining solution. The bargaining solution represents the analytical proof to the intuition of the difficulty in implementing procurement contracts stated by Laffont and Tirole (1993). Copyright 1999 by Kluwer Academic Publishers
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