Rent Extractions and Efficiency in Long Term Procurement

• Autor(a) principal: Leite, António Nogueira
• Data de Publicação: 1989
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/84567

We consider the procurement setting in which a sponsor and a contractor are concerned with the construction of a long term project where the project requires a number of tasks to be completed before the benefit from the project can be realized. The contractor has private, task specific information which is relevant in cost determination. We focus on the case where the sponsor can precommit to compensation per task and where the contractor knows precisely the cost of each task right from the beginning of construction of the project. In this setting we construct the optimal "direct contract" and show that, for each particular firm, the optimal payment consists of two parts: the true cost of the project plus the contractor's reservation level of profit and a premium term which increases with the maximum number of high cost tasks that the sponsor is willing to allow. The sponsor resolves the tradeoff between allocative efficiency and increased ability to extract contractor's rents (which constitute the optimal contract's premium term) on the basis of her own beliefs. Furthermore, we show that the solution to the sponsor's problem is one of underemployment of the existing resources.