Free Riding in Procurement Design

Barbosa, Klenio (2009) Free Riding in Procurement Design. TSE Working Paper, n. 09-128

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Official URL: http://tse-fr.eu/pub/22251

Abstract

Low-powered contracts do not provide proper incentives to reduce cost; still empirical studies show that they are quite pervasive in public and private procurement. This paper argues that low-powered contracts arise due to a free-riding problem when the contractor enjoys economies of scale/scope working for different buyers. A buyer, offering a procurement contract to the contractor, does not fully internalize that higher-powered incentives provide cost reduction in the contractor's activities, benefiting other buyers. As a result, buyers offer lower-powered contracts than what would be designed by cooperative buyers. Strikingly, the higher the contractor's benefits from economies of scope/scale are, the lower the power of the procurement contracts will be. In addition, laws which force buyers to award fixed-price contracts can be welfare-enhancing.

Item Type: Monograph (Working Paper)
Language: English
Date: December 2009
Uncontrolled Keywords: free-riding, procurement, multibuyers
JEL codes: H57 - Procurement
L24 - Contracting Out; Joint Ventures; Technology Licensing
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:08
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:22251
URI: http://publications.ut-capitole.fr/id/eprint/15020

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