Incentives and Adaptation: Evidence from Highway Procurement in Minnesota
Harvard University; National Bureau of Economic Research (NBER)
University of Michigan at Ann Arbor - Economics; National Bureau of Economic Research (NBER)
December 16, 2011
Procurement projects often encounter unanticipated problems. Deadlines and penalties are one important instrument used to incentivize contractors to adapt their plans. We develop a theory of highway procurement in which contractors must modify their construction rate following a productivity shock. We model how time incentives affect the work rate and time taken, characterizing the efficient contract design. Using new micro-level data from Minnesota that includes day-by-day information on work plans, actual outcomes and delays, we find strong evidence supporting the theory. As an application, we build an econometric model that endogenizes adaptation, and simulate how different incentive structures affect outcomes and the variance of contractor payments. Accounting for the traffic delays caused by construction, switching to a more efficient design would substantially increase welfare without substantially increasing risk.
Number of Pages in PDF File: 34
Keywords: Auctions, Procurement, Contracts, Incentives, Adaptation
JEL Classification: D86, H57, L92working papers series
Date posted: December 18, 2011
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