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Criteria for contracting-out decisions when contractors can deceive

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  • Jacob Paroush
  • Jonas Prager

Abstract

This paper presents a decision rule for contracting out that explicitly takes into account the possibility of contractor deception. In the model presented here, the contracting agency opts to contract out only when the production savings exceeds the sum of its optimal monitoring expenses, optimal fine collection costs, and the expected loss stemming from undetected cheating. Furthermore, in awarding contracts, the contracting agency explicitly takes into account the risk aversion of the contractor. The analysis suggests that effective contracts must consider the contractor's attitude toward risk and permit the contractor to retain some positive rent, conclusions that give rise to a number of nonintuitive policy implications. Copyright International Atlantic Economic Society 1999

Suggested Citation

  • Jacob Paroush & Jonas Prager, 1999. "Criteria for contracting-out decisions when contractors can deceive," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 27(4), pages 376-383, December.
    • Handle: RePEc:kap:atlecj:v:27:y:1999:i:4:p:376-383
    DOI: 10.1007/BF02298334
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    References listed on IDEAS

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    1. David E. M. Sappington & Joseph E. Stiglitz, 1987. "Privatization, information and incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 567-585.
    2. Prager, J., 1992. "Contracting Out: Theory and Policy," Working Papers 92-50, C.V. Starr Center for Applied Economics, New York University.
    3. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    4. repec:bla:econom:v:59:y:1992:i:233:p:107-20 is not listed on IDEAS
    5. Frey, Bruno S, 1993. "Does Monitoring Increase Work Effort? The Rivalry with Trust and Loyalty," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 663-670, October.
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    Cited by:

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    2. Germa Bel & Anton Costas, 2004. "Do public sector reforms get rusty? An empirical analysis on privatization of solid waste collection," Public Economics 0409014, University Library of Munich, Germany.

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