%0 Report
%9 Working Paper
%A Barbosa, Klenio
%B TSE Working Paper
%D 2009
%F publications:15020
%K free-riding
%K procurement
%K multibuyers
%T Free Riding in Procurement Design
%U https://publications.ut-capitole.fr/id/eprint/15020/
%V 09-128
%X 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.