Incentives versus Transaction Costs: A Theory of Procurement Contracts
Опубликовано на портале: 06-10-2003
Stanford University - Department of Economics: Working Paper. 1999.
Inspired by facts from the private sector construction industry, we develop a model that explains many of the stylized facts about 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 or when time-to-completion is more valuable. We also show when fixed-price or cost-plus contracts would be preferred to other incentive contracts, explaining the prevalence of these simple contracts. We then apply our model to the make-or-buy procurement decision and conclude that internal production dominates market procurement when the product is more complex, providing foundations for Transaction Cost Economics.
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