Public Sector Procurement: Lump-Sum Payments or Optimal Contracts?

Regulation Initiative Working Paper No. 36

25 Pages Posted: 1 Oct 2002

See all articles by Paul Levine

Paul Levine

School of Economics, University of Surrey

Neil Rickman

University of Surrey - Department of Economics

Date Written: April 2000

Abstract

In a Dynamic setting, we compare procurement schemes in the form of a lump-sum payment with an optimal information-revealing menu of contracts without commitment. We find that lump-sum contracts generate two benefits. First, they always provide optimal levels of effort. Second, they 'tie the hands' of the producer, and avoid the ratchet effect. These benefits must be weighted against the costs of higher rent in the second period. For a low discount factor such costs dominate, but for a high discount rate, when the ratchet effect becomes acute, the welfare gap becomes small and lump-sum payments may even welfare-dominate an optimal menu.

JEL Classification: L51

Suggested Citation

Levine, Paul L. and Rickman, Neil, Public Sector Procurement: Lump-Sum Payments or Optimal Contracts? (April 2000). Regulation Initiative Working Paper No. 36. Available at SSRN: https://ssrn.com/abstract=319860 or http://dx.doi.org/10.2139/ssrn.319860

Paul L. Levine (Contact Author)

School of Economics, University of Surrey ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 259 380 Ext. 2773 (Phone)
+44 1483 259 548 (Fax)

Neil Rickman

University of Surrey - Department of Economics ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 689 923 (Phone)
+44 1483 689 548 (Fax)

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