R&D Effects of Incomplete Procurement Contracts

Applied Economics Letters, vol. 8, no.11, pp. 697-699

Posted: 6 Apr 2016

See all articles by Rajeev K. Goel

Rajeev K. Goel

Illinois State University - Department of Economics

Date Written: 2001

Abstract

This paper examines auctions of incentive contracts, where the principal (a government agency) contracts with a private vendor to supply a given quantity. The contract is incomplete as the agent's research behaviour is unobservable and is not in the principal's objective function. The agent, however, has an incentive to engage in research. Therefore, the principal's actions inadvertently affect research spending. It is shown that the agent's optimal research spending responds to changes in contractual design. In general, the agent's research response is dependent upon the size of the bid and the probability of product innovation. Policy implications are discussed.

Suggested Citation

Goel, Rajeev K., R&D Effects of Incomplete Procurement Contracts (2001). Applied Economics Letters, vol. 8, no.11, pp. 697-699. Available at SSRN: https://ssrn.com/abstract=2758938

Rajeev K. Goel (Contact Author)

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

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