Using Cost Observation to Regulate Firms
Year: 1986
Type: article
Abstract: The paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier (1) has superior information about the cost of the project and (2) invests in cost reduction. The main result states that, under risk neutrality, the supplier announces an expected cost and is given an incentive contract linear in cost overruns. This (optimal) contract moves toward a fixed-price contract as the announced cost decreases. An investment choice is then introduced and the use of a rate-of-return regulation is studied.
Source: Journal of Political Economy
DOI: 10.1086/261392
Authors: Jean-Jacques Laffont, Jean Tirole
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1973465190