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Procurement Policy and Contracting Efficiency

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  • Bower, Anthony G

Abstract

The contracting literature has emphasized the optimality of using certain contracting instruments, such as multiple cost observations, full commitment, self-selection, and competition. A two-period procurement model is constructed incorporating all of the instruments and optimal contracts are characterized. Numerical examples suggest that the marginal benefits of full commitment, self-selection, and multiple cost observations are small, while the benefits of competition are larger. To obtain some evidence on contracting costs, defense contracting is reviewed. It indicates that using these instruments is very costly, thus calling into question the optimality of using all of the procurement instruments. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Bower, Anthony G, 1993. "Procurement Policy and Contracting Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 873-901, November.
    • Handle: RePEc:ier:iecrev:v:34:y:1993:i:4:p:873-901
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    Cited by:

    1. Pal Debashis & Sappington David E. M. & Topolyan Iryna, 2022. "Pareto Gains from Limiting Compensation Options," IZA Journal of Labor Economics, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 12(1), pages 1-29, January.
    2. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    3. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    4. Leon Yang Chu & David E.M. Sappington, 2009. "Implementing high‐powered contracts to motivate intertemporal effort supply," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 296-316, June.
    5. Ismail Saglam, 2024. "The Bayesian approach to monopoly regulation after 40 years," Journal of Regulatory Economics, Springer, vol. 65(1), pages 108-136, June.
    6. Leon Yang Chu & David E. M. Sappington, 2007. "Simple Cost-Sharing Contracts," American Economic Review, American Economic Association, vol. 97(1), pages 419-428, March.
    7. Kopsakangas-Savolainen, Maria & Svento, Rauli, 2010. "Comparing welfare effects of different regulation schemes: An application to the electricity distribution industry," Energy Policy, Elsevier, vol. 38(11), pages 7370-7377, November.
    8. repec:hal:psewpa:hal-00710639 is not listed on IDEAS
    9. David P. Brown & David E.M. Sappington, 2018. "Optimal Procurement of Distributed Energy Resources," The Energy Journal, , vol. 39(5), pages 131-156, September.
    10. Fuqiang Zhang, 2010. "Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 608-626, August.
    11. Brown, David P. & Sappington, David E. M., 2023. "Designing Incentive Regulation in the Electricity Sector," Working Papers 2023-10, University of Alberta, Department of Economics.
    12. Leon Yang Chu & David E. M. Sappington, 2015. "Contracting with Private Knowledge of Production Capacity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 752-785, October.
    13. Pavlova, Natalia (Павлова, Наталья) & Morozov, Anton (Морозов, Антон), 2018. "Markets in the Field of the State Defense Order: Opportunities and Limitations for the Development of Competition [Рынки В Сфере Государственного Оборонного Заказа: Возможности И Ограничения Для Ра," Working Papers 061811, Russian Presidential Academy of National Economy and Public Administration.
    14. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    15. William P. Rogerson, 2003. "Simple Menus of Contracts in Cost-Based Procurement and Regulation," American Economic Review, American Economic Association, vol. 93(3), pages 919-926, June.
    16. repec:hal:pseose:hal-00710639 is not listed on IDEAS

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