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Menus of Linear Contracts in Procurement with Type-Dependent Reservation Utility

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  • Shane B. Evans

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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.

Suggested Citation

  • Shane B. Evans, 2010. "Menus of Linear Contracts in Procurement with Type-Dependent Reservation Utility," ANU Working Papers in Economics and Econometrics 2010-531, Australian National University, College of Business and Economics, School of Economics.
  • Handle: RePEc:acb:cbeeco:2010-531
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp531.pdf
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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