IDEAS home Printed from https://ideas.repec.org/a/eee/proeco/v145y2013i1p199-207.html
   My bibliography  Save this article

Using Nash bargaining to design project management contracts under cost uncertainty

Author

Listed:
  • Lippman, Steven A.
  • McCardle, Kevin F.
  • Tang, Christopher S.

Abstract

In the design of procurement contracts, cost sharing, wherein the contractor receives a fixed fee plus a fraction of his cost, is common when the cost for completing the project is uncertain. We determine the best cost-sharing contract between a risk-neutral project manager and a risk-averse contractor when negotiation proceeds in accord with Nash bargaining. We examine the characteristics of the contract when the contractor can invest to reduce the mean and/or the uncertainty of the project cost. We show that cost-plus contracts dominate fixed-price contracts as well as all other cost-sharing contracts. In order to extend our analysis to the case when the value of the project itself is uncertain, we employ the recent method of embedded Nash bargaining. Finally, we generalize our main result by allowing an asymmetric Nash bargaining solution.

Suggested Citation

  • Lippman, Steven A. & McCardle, Kevin F. & Tang, Christopher S., 2013. "Using Nash bargaining to design project management contracts under cost uncertainty," International Journal of Production Economics, Elsevier, vol. 145(1), pages 199-207.
    • Handle: RePEc:eee:proeco:v:145:y:2013:i:1:p:199-207
    DOI: 10.1016/j.ijpe.2013.04.036
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0925527313002004
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijpe.2013.04.036?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    3. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    4. Haresh Gurnani & Mengze Shi, 2006. "A Bargaining Model for a First-Time Interaction Under Asymmetric Beliefs of Supply Reliability," Management Science, INFORMS, vol. 52(6), pages 865-880, June.
    5. James S. Dyer & Rakesh K. Sarin, 1982. "Relative Risk Aversion," Management Science, INFORMS, vol. 28(8), pages 875-886, August.
    6. H. Dharma Kwon & Steven A. Lippman & Kevin F. McCardle & Christopher S. Tang, 2010. "Project Management Contracts with Delayed Payments," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 692-707, October.
    7. Hiller, John R & Tollison, Robert D, 1978. "Incentive versus Cost-Plus Contracts in Defense Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 26(3), pages 239-248, March.
    8. Dharma Kwon, H. & Lippman, Steven A. & Tang, Christopher S., 2010. "Optimal time-based and cost-based coordinated project contracts with unobservable work rates," International Journal of Production Economics, Elsevier, vol. 126(2), pages 247-254, August.
    9. Philippe Delquié, 2008. "Interpretation of the Risk Tolerance Coefficient in Terms of Maximum Acceptable Loss," Decision Analysis, INFORMS, vol. 5(1), pages 5-9, March.
    10. Nagarajan, Mahesh & Sosic, Greys, 2008. "Game-theoretic analysis of cooperation among supply chain agents: Review and extensions," European Journal of Operational Research, Elsevier, vol. 187(3), pages 719-745, June.
    11. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    12. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    13. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
    14. Turner, J.R., 2001. "Project Contract Management and a Theory of Organization," ERIM Report Series Research in Management ERS-2001-43-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    15. John C. Harsanyi & Reinhard Selten, 1972. "A Generalized Nash Solution for Two-Person Bargaining Games with Incomplete Information," Management Science, INFORMS, vol. 18(5-Part-2), pages 80-106, January.
    16. McCall, J J, 1970. "The Simple Economics of Incentive Contracting," American Economic Review, American Economic Association, vol. 60(5), pages 837-846, December.
    17. Steven A. Lippman & Kevin F. McCardle, 2004. "Sex, Lies, and the Hillblom Estate: A Decision Analysis," Decision Analysis, INFORMS, vol. 1(3), pages 149-166, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kerkhove, L.-P. & Vanhoucke, M., 2017. "A parallel multi-objective scatter search for optimising incentive contract design in projects," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1066-1084.
    2. Luong, Phat V. & Xu, Xiaowei, 2020. "Pass-through of commodity price shocks in distribution channels with risk-averse agents," International Journal of Production Economics, Elsevier, vol. 226(C).
    3. Yigal Gerchak & Eugene Khmelnitsky, 2019. "Bargaining over shares of uncertain future profits," EURO Journal on Decision Processes, Springer;EURO - The Association of European Operational Research Societies, vol. 7(1), pages 55-68, May.
    4. Zheng, Shiyuan & Negenborn, Rudy R., 2015. "Price negotiation between supplier and buyer under uncertainty with fixed demand and elastic demand," International Journal of Production Economics, Elsevier, vol. 167(C), pages 35-44.
    5. Jackson, Canek & Pascual, Rodrigo, 2021. "Joint pricing and maintenance strategies in availability-based product-service systems under different overhaul conditions," Reliability Engineering and System Safety, Elsevier, vol. 216(C).
    6. Palit, Niladri & Brint, Andrew, 2020. "A win-win supply chain solution using project contracts with bargaining games," Operations Research Perspectives, Elsevier, vol. 7(C).
    7. Luo, Chunlin & Zhou, Xiaoyang & Lev, Benjamin, 2022. "Core, shapley value, nucleolus and nash bargaining solution: A Survey of recent developments and applications in operations management," Omega, Elsevier, vol. 110(C).
    8. Palit, Niladri & Brint, Andrew, 2020. "The effect of risk aversion on the optimal project resource rate," European Journal of Operational Research, Elsevier, vol. 287(3), pages 1092-1104.
    9. Kerkhove, L.P. & Vanhoucke, M., 2016. "Incentive contract design for projects: The owner׳s perspective," Omega, Elsevier, vol. 62(C), pages 93-114.
    10. Mahendra Piraveenan, 2019. "Applications of Game Theory in Project Management: A Structured Review and Analysis," Mathematics, MDPI, vol. 7(9), pages 1-31, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shi Chen & Hau Lee, 2017. "Incentive Alignment and Coordination of Project Supply Chains," Management Science, INFORMS, vol. 63(4), pages 1011-1025, April.
    2. Suresh P. Sethi & Sushil Gupta & Vipin K. Agrawal & Vijay K. Agrawal, 2022. "Nobel laureates’ contributions to and impacts on operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4283-4303, December.
    3. William S. Lovejoy, 2010. "Bargaining Chains," Management Science, INFORMS, vol. 56(12), pages 2282-2301, December.
    4. Moon, Yongma & Yao, Tao & Park, Sungsoon, 2011. "Price negotiation under uncertainty," International Journal of Production Economics, Elsevier, vol. 134(2), pages 413-423, December.
    5. Zheng, Shiyuan & Negenborn, Rudy R., 2015. "Price negotiation between supplier and buyer under uncertainty with fixed demand and elastic demand," International Journal of Production Economics, Elsevier, vol. 167(C), pages 35-44.
    6. Dharma Kwon, H. & Lippman, Steven A. & Tang, Christopher S., 2010. "Optimal time-based and cost-based coordinated project contracts with unobservable work rates," International Journal of Production Economics, Elsevier, vol. 126(2), pages 247-254, August.
    7. Matsui, Kenji, 2020. "Optimal bargaining timing of a wholesale price for a manufacturer with a retailer in a dual-channel supply chain," European Journal of Operational Research, Elsevier, vol. 287(1), pages 225-236.
    8. Ethan Ilzetzki, 2024. "Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth," American Economic Review, American Economic Association, vol. 114(8), pages 2436-2471, August.
    9. Kunter, Marcus, 2012. "Coordination via cost and revenue sharing in manufacturer–retailer channels," European Journal of Operational Research, Elsevier, vol. 216(2), pages 477-486.
    10. Laruelle, Annick & Valenciano, Federico, 2007. "Bargaining in committees as an extension of Nash's bargaining theory," Journal of Economic Theory, Elsevier, vol. 132(1), pages 291-305, January.
    11. Lv, Wei & Li, Hongyi & Tang, Jiafu, 2017. "Bargaining model of labor disputes considering social mediation and bounded rationalityAuthor-Name: Liu, Dehai," European Journal of Operational Research, Elsevier, vol. 262(3), pages 1064-1071.
    12. Bendoly, Elliot & van Wezel, Wout & Bachrach, Daniel G. (ed.), 2015. "The Handbook of Behavioral Operations Management: Social and Psychological Dynamics in Production and Service Settings," OUP Catalogue, Oxford University Press, number 9780199357222.
    13. Binmore, Ken & Osborne, Martin J. & Rubinstein, Ariel, 1992. "Noncooperative models of bargaining," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 7, pages 179-225, Elsevier.
    14. Driesen, Bram & Perea, Andrés & Peters, Hans, 2012. "Alternating offers bargaining with loss aversion," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 103-118.
    15. Ronghuo Zheng & Tinglong Dai & Katia Sycara & Nilanjan Chakraborty, 2016. "Automated Multilateral Negotiation on Multiple Issues with Private Information," INFORMS Journal on Computing, INFORMS, vol. 28(4), pages 612-628, November.
    16. Goker Aydin & H. Sebastian Heese, 2015. "Bargaining for an Assortment," Management Science, INFORMS, vol. 61(3), pages 542-559, March.
    17. Joan Esteban & József Sákovics, 2002. "Endogenous bargaining power," Economics Working Papers 644, Department of Economics and Business, Universitat Pompeu Fabra.
    18. Panda, S. & Modak, N.M. & Basu, M. & Goyal, S.K., 2015. "Channel coordination and profit distribution in a social responsible three-layer supply chain," International Journal of Production Economics, Elsevier, vol. 168(C), pages 224-233.
    19. P. Ding & M. D. Gerst & G. Bang & M. E. Borsuk, 2015. "An Application of Automated Mediation to International Climate Treaty Negotiation," Group Decision and Negotiation, Springer, vol. 24(5), pages 885-903, September.
    20. Kjell Hausken, 1997. "Game-theoretic and Behavioral Negotiation Theory," Group Decision and Negotiation, Springer, vol. 6(6), pages 511-528, December.

    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:eee:proeco:v:145:y:2013:i:1:p:199-207. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijpe .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.