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A Simple Numerical Evaluation of the Incentive Contracts for Japan’s Defense Equipment

Author

Listed:
  • Motohiko Kasai

    (Ministry of Defense, Japan)

  • Naoki Watanabe

    (Keio University)

Abstract

The aim of this study is to numerically evaluate the performance of three schemes in incentive contracts used by the Japan Ministry of Defense for its procurement of defense equipment: Two schemes that had previously been used and one scheme that is currently being used. We formalized the transaction between the Ministry of Defense and a supplier as a principal-agent model and compared the effectiveness of providing an incentive for the supplier to exert effort for its cost reduction to the benefit of the general public in Japan. In a simple numerical study, we specified the probability distribution of the amount of cost reduction per unit and fixed the effort level so that we could interpret whether the supplier chooses to exert effort or not on cost reduction. As a result, it was found that changes in the schemes that have been made did not clearly improve the welfare of the general public and that the incentive scheme currently being used is always the best one among those three schemes.

Suggested Citation

  • Motohiko Kasai & Naoki Watanabe, 2021. "A Simple Numerical Evaluation of the Incentive Contracts for Japan’s Defense Equipment," The Review of Socionetwork Strategies, Springer, vol. 15(2), pages 575-596, November.
    • Handle: RePEc:spr:trosos:v:15:y:2021:i:2:d:10.1007_s12626-021-00090-9
    DOI: 10.1007/s12626-021-00090-9
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    References listed on IDEAS

    as
    1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    2. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
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    More about this item

    Keywords

    Defense equipment contract; Principal-agent analysis; Cost reduction; Public welfare; Numerical evaluation;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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