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

  • Shane B. Evans

    ()

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.

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File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp531.pdf
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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2010-531.

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Length: 41 Pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:acb:cbeeco:2010-531
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