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Menus of linear contracts in procurement with type-dependent reservation utility

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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

  • Evans, Shane, 2010. "Menus of linear contracts in procurement with type-dependent reservation utility," Working Papers 10280, University of Tasmania, Tasmanian School of Business and Economics, revised 05 Oct 2010.
  • Handle: RePEc:tas:wpaper:10280
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    File URL: http://eprints.utas.edu.au/10280/1/DP2010-09_Evans_Procurement_Oct_2010.pdf
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    References listed on IDEAS

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    1. William P. Rogerson, 1987. "On the Optimality of Menus of Linear Contracts," Discussion Papers 714, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    3. Antonio Acconcia & Riccardo Martina & Salvatore Piccolo, 2005. "Vertical Restraints under Asymmetric Information: On the Role of Participation Constraints," CSEF Working Papers 141, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jan 2007.
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    13. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
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    15. William P. Rogerson, 2003. "Simple Menus of Contracts in Cost-Based Procurement and Regulation," American Economic Review, American Economic Association, pages 919-926.
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    More about this item

    Keywords

    Linear Contracts; Countervailing Incentives; Type Dependent Reservation Utility;

    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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