Garrett, Daniel F. (2014) Robustness of simple menus of contracts in cost-based procurement. Games and Economic Behavior, vol. 87. pp. 631-641.

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Identification Number : 10.1016/j.geb.2013.06.004


We consider a model of cost-based procurement in which the principal faces Knightian uncertainty about the agent's preferences for cost reduction. We show that a particularly simple incentive scheme—a menu comprising a fixed-price contract and a cost-reimbursement contract—minimizes the maximum expected payment, where this maximum is taken over the set of possible agent preferences. For some parameters of the problem, a range of alternative incentive schemes also satisfy this criterion. We show that the simple incentive scheme is not weakly dominated by any of the alternatives: there does not exist an alternative mechanism for which the expected payment is no higher for all realizations of the agent's preferences and strictly lower for some realization.

Item Type: Article
Language: English
Date: September 2014
Refereed: Yes
Uncontrolled Keywords: Cost-based procurement, Simple mechanisms, Minimax
JEL Classification: C44 - Statistical Decision Theory; Operations Research
H57 - Procurement
L51 - Economics of Regulation
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 21 Sep 2015 13:08
Last Modified: 27 Oct 2021 13:36
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