Criteria for contracting-out decisions when contractors can deceive

Jacob Paroush, Jonas Prager

    Research output: Contribution to journalArticle

    Abstract

    This paper presents a decision rule for contracting out that explicitly takes into account the possibility of contractor deception. In the model presented here, the contracting agency opts to contract out only when the production savings exceeds the sum of its optimal monitoring expenses, optimal fine collection costs, and the expected loss stemming from undetected cheating. Furthermore, in awarding contracts, the contracting agency explicitly takes into account the risk aversion of the contractor. The analysis suggests that effective contracts must consider the contractor's attitude toward risk and permit the contractor to retain some positive rent, conclusions that give rise to a number of nonintuitive policy implications.

    Original languageEnglish (US)
    Pages (from-to)376-383
    Number of pages8
    JournalAtlantic Economic Journal
    Volume27
    Issue number4
    DOIs
    StatePublished - 1999

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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