Incentives In Procurement Contracting

by Jim Leitzel, Jean Tirole (Editor)

This volume presents a nontechnical treatment of issues that arise in procurement contracting, with an emphasis on major weapons systems procurement. Employing the economic theory of agency as their analytical framework, contributors assess the incentives that arise, for both buyers and sellers, in different contractual settings.
Procurement contracting can become problematic when either the buyer or the seller has privileged information. The production costs of a project, for example, may be known to the seller but unknown to the buyer. Another potential difficulty can occur if the quality of a project cannot be verified to third parties, such as courts (even if both the buyer and seller can accurately judge the quality); contracts that are contingent upon quality will generally not be enforceable. Also, the typical defense procurement buyer is usually a hierarchy rather than a single agent. Different levels in the hierarchy may have different preferences, so strategic behavior can arise on the buying side viewed in isolation. Or collusive behavior between the seller and one level of the buying hierarchy can arise, again fostered by private information and differing preferences.
This book offers a lucid account of the problems - such as high cost and low quality - that can plague major weapons systems procurement. Together, the chapters provide improved understanding of agency theory in general and expert insight into weapons procurement in particular.

161 pages, Hardcover

First published January 1, 1993