IDEAS home Printed from https://ideas.repec.org/p/bdp/wpaper/2015002.html
   My bibliography  Save this paper

Optimal monitoring in dynamic procurement contracts

Author

Listed:
  • Andreas Asseyer

    () (Humboldt-Universitaet zu Berlin)

Abstract

Which information should government authorities monitor when they procure goods from private suppliers? I analyze this question in a principal-agent model of procurement with moral hazard concerning cost-reducing investments and dynamic adverse selection about investment cost and a production cost shock. The principal can monitor the investment, the shock, or both at a cost. I show that it is never optimal to monitor investment and shock. Monitoring investment is always at least as effective as monitoring the shock. The two instruments are equivalent if the level of investment cost is high. Monitoring may decrease efficiency in the optimal contract.

Suggested Citation

  • Andreas Asseyer, 2015. "Optimal monitoring in dynamic procurement contracts," Working Papers 2015002, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
  • Handle: RePEc:bdp:wpaper:2015002
    as

    Download full text from publisher

    File URL: http://repec.bdpems.de/repec/bdp/wpaper/pdf/WP_2015-02.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    2. Hoppe, Eva I. & Kusterer, David J. & Schmitz, Patrick W., 2013. "Public–private partnerships versus traditional procurement: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 145-166.
    3. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2013. "The Basic Public Finance Of Public–Private Partnerships," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 83-111, February.
    4. Péter Eső & Balázs Szentes, 2007. "The price of advice," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 863-880, December.
    5. Nicolás Figueroa & Gonzalo Cisternas, 2007. "Sequential Procurement Auctions and Their Effect on Investment Decisions," Documentos de Trabajo 230, Centro de Economía Aplicada, Universidad de Chile.
    6. Krähmer, Daniel & Strausz, Roland, 2015. "Ex post information rents in sequential screening," Games and Economic Behavior, Elsevier, vol. 90(C), pages 257-273.
    7. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    8. Roland Strausz, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 337-357.
    9. Maskin, Eric & Riley, John, 1985. "Input versus output incentive schemes," Journal of Public Economics, Elsevier, vol. 28(1), pages 1-23, October.
    10. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    11. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    12. Bag, Parimal Kanti, 1997. "Optimal auction design and R&D," European Economic Review, Elsevier, vol. 41(9), pages 1655-1674, December.
    13. Thomas Astebro, 2004. "Sunk Costs and the Depth and Probability of Technology Adoption," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 381-399, September.
    14. Alessandro Pavan & Ilya Segal & Juuso Toikka, 2014. "Dynamic Mechanism Design: A Myersonian Approach," Econometrica, Econometric Society, vol. 82(2), pages 601-653, March.
    15. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    16. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-685, August.
    17. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
    18. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 56-74, March.
    19. M. Dewatripont & E. Maskin, 1995. "Contractual Contingencies and Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 704-719, Winter.
    20. Myerson, Roger B, 1986. "Multistage Games with Communication," Econometrica, Econometric Society, vol. 54(2), pages 323-358, March.
    21. Tan, Guofu, 1992. "Entry and R & D in procurement contracting," Journal of Economic Theory, Elsevier, vol. 58(1), pages 41-60, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    procurement; monitoring; dynamic contracts;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:bdp:wpaper:2015002. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jenny Schmiedel). General contact details of provider: http://edirc.repec.org/data/bdpemde.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.