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Optimal Procurement Contracts with Pre--Project Planning

Author

Listed:
  • Daniel Krämer
  • Roland Strausz
Abstract
The paper studies procurement contracts with pre--project investigations under hidden information and hidden action. The principal generally benefits from inducing the agent to conduct pre--project investigations to avoid cost overruns and false project cancelations. Due to a rent effect, hidden information leads to systematic distortions in information acquisition: the agent acquires too much information to prevent cost overruns and too little information to prevent false project cancelations. The optimal mechanism is a menu of option contracts which exhibit a costly quitting option. They achieve the dual goal of providing incentives for information acquisition and truthful information revelation.

Suggested Citation

  • Daniel Krämer & Roland Strausz, 2009. "Optimal Procurement Contracts with Pre--Project Planning," Papers 036, Departmental Working Papers.
    • Handle: RePEc:bef:lsbest:036
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Information acquisition; procurement; screening; implementation errors;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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