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Risk sharing in procurement

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  • Deneckere, Raymond
  • de Palma, André
  • Leruth, Luc

Abstract

We introduce bilateral risk aversion into the mixed adverse selection - moral hazard model of Laffont and Tirole (1986). The presence of exogenous risk interacts with the adverse selection problem in interesting ways. In particular, we show that it is never optimal to present the firm with a fixed price contract, that the efficient firm typically bears more risk than the inefficient firm, and that an increase in exogenous risk may bring about a decrease in expected cost of the project. As a by-product, we also establish that the famous ‘no-distortion-on-the top’ result in adverse selection models relies on risk neutrality of the agent.

Suggested Citation

  • Deneckere, Raymond & de Palma, André & Leruth, Luc, 2019. "Risk sharing in procurement," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 173-220.
    • Handle: RePEc:eee:indorg:v:65:y:2019:i:c:p:173-220
    DOI: 10.1016/j.ijindorg.2019.01.002
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    References listed on IDEAS

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    3. Escobar, Juan F. & Pulgar, Carlos, 2017. "Motivating with simple contracts," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 192-214.
    4. Tracy R. Lewis & David E.M. Sappington, 1995. "Optimal Capital Structure in Agency Relationships," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 343-361, Autumn.
    5. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    6. Stanley L. Engerman & Kenneth L. Sokoloff, 2006. "Digging the Dirt at Public Expense: Digging the Dirt at Public Expense Erie Canal and Other Public Works," NBER Chapters, in: Corruption and Reform: Lessons from America's Economic History, pages 95-122, National Bureau of Economic Research, Inc.
    7. Laffont, Jean-Jacques & Rochet, Jean-Charles, 1998. "Regulation of a Risk Averse Firm," Games and Economic Behavior, Elsevier, vol. 25(2), pages 149-173, November.
    8. Elisabetta IOSSA & Stephane SAUSSIER, 2018. "Public Private Partnerships In Europe For Building And Managing Public Infrastructures: An Economic Perspective," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 89(1), pages 25-48, March.
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    Cited by:

    1. André de Palma & Julien Monardo, 2019. "Natural Monopoly in Transport," Working Papers hal-02121079, HAL.

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    More about this item

    Keywords

    Regulation; Procurement; Incentives; Risk sharing;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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