Article ID Journal Published Year Pages File Type
957085 Journal of Economic Theory 2007 9 Pages PDF
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.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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