A note on optimal procurement contracts with limited direct cost inflation |
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Authors: | Leon Yang Chu |
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Institution: | a Department of Information and Operations Management, Bridge Hall 401, University of Southern California, Los Angeles, CA 90089, USA b Department of Economics, University of Florida, 224 Matherly Hall, P.O. Box 117140, Gainesville, FL 32611, USA |
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Abstract: | Laffont and Tirole's Using cost observation to regulate firms, J. Polit. Econ. 94 (1986) 614-641] pioneering analysis identifies the optimal procurement contract when the supplier can readily inflate his innate production cost without detection. When the buyer has some ability to limit such cost inflation, an alternative contract can outperform the contract identified by Laffont and Tirole. The alternative contract induces substantial pooling, discontinuous production costs and effort supply, and rent that varies non-monotonically with innate cost. |
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Keywords: | D82 L50 |
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