Incentives Versus Transaction Costs: A Theory of Procurement Contracts

Stanford University, Department of Economics Working Paper No. 99-029

33 Pages Posted: 16 Nov 1999

See all articles by Steven Tadelis

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2001

Abstract

Inspired by facts from the private sector construction industry, we develop a model that explains many stylized facts of procurement contracts. The buyer in our model incurs a cost of providing a comprehensive design, and is faced with a trade-off between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost plus contracts are preferred to fixed price contracts when a project is more complex. We briefly discuss how fixed-price or cost-plus contracts might be preferred to other incentive contracts. Finally, our model provides some micro-foundations for ideas from Transaction Cost Economics.

JEL Classification: D23, D82, L14, L22, L74

Suggested Citation

Tadelis, Steven and Bajari, Patrick, Incentives Versus Transaction Costs: A Theory of Procurement Contracts (April 2001). Stanford University, Department of Economics Working Paper No. 99-029. Available at SSRN: https://ssrn.com/abstract=193121 or http://dx.doi.org/10.2139/ssrn.193121

Steven Tadelis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
United States
734-763-5319 (Phone)

HOME PAGE: http://www-personal.umich.edu/~bajari/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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