Work

Incentives versus Transaction Costs: A Theory of Procurement Contracts

Year: 2001

Type: article

Abstract: Inspired by facts from the private sector construction industry, we develop a model that explains many stylized facts of procurement contracts. The buyer in our model incurs a cost of providing a comprehensive design, and is faced with a trade-off between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost plus contracts are preferred to fixed price contracts when a project is more complex. We briefly discuss how fixed-price or cost-plus contracts might be preferred to other incentive contracts. Finally, our model provides some micro-foundations for ideas from Transaction Cost Economics.

Source: The RAND Journal of Economics

DOI: 10.2307/2696361

Authors: Steven Tadelis, Patrick Bajari

Institutions: National Bureau of Economic Research, Centre for Economic Policy Research, University of California, Berkeley, University of Michigan

Language: English

Topic: Law, Economics, and Judicial Systems

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3123362894

FWCI: 51.55

Cites: 29

Cited by: 1,121

Related to: 10