Procurement Contracting with Time Incentives: Theory and Evidence

In public sector procurement, social welfare often depends on the time taken to complete the contract. A leading example is highway construction, where slow completion times inflict a negative externality on commuters. Recently, highway departments have introduced innovative contracting methods based on scoring auctions that give contractors explicit time incentives. We characterize equilibrium bidding and efficient design of these contracts. We then gather an extensive data set of highway repair projects awarded by the California Department of Transportation between 2003 and 2008 that includes both innovative and standard contracts. Comparing similar con- tracts in which the innovative design was and was not used, we show that the welfare gains to commuters from quicker completion substantially exceeded the increase in the winning bid. Having argued that the current policy is effective, we then develop a structural econometric model that endogenizes participation and bidding to examine counterfactual policies. Our estimates suggest that while the current policy raised com- muter surplus relative to the contractor's costs by $359M (6.8$1.52B (29%).

Efficient Contracts for Carbon Credits from Reforestation Projects

This paper tackles the complex issue of how buyers and sellers within a domestic carbon credit system designed to include regenerating indigenous forest would optimally design contracts for trades of the new good, "carbon sink credits". The paper begins by briefly defining the constraints that sink projects must meet. This implicitly shows the freedom we have in designing contracts. In the context of a simple numerical example I discuss the constraints that the market puts on contracts. In particular I consider the interests of the buyers and sellers, and how they can maximise and share gains through contract design. I outline the sources of risk and discuss who has advantages in dealing with these risks. The best contract designs impose the risk on those most able to address or absorb it. I illustrate the potential gains from sink contracts with a range of conditions and contracts.

EFFICIENT CONTRACTS FOR CARBON CREDITS FROM REFORESTATION PROJECTS

This paper tackles the complex issue of how buyers and sellers within a domestic carbon credit system designed to include regenerating indigenous forest would optimally design contracts for trades of the new good, “carbon sink credits”. The paper begins by briefly defining the constraints that sink projects must meet. This implicitly shows the freedom we have in designing contracts. In the context of a simple numerical example I discuss the constraints that the market puts on contracts. In particular I consider the interests of the buyers and sellers, and how they can maximise and share gains through contract design. I outline the sources of risk and discuss who has advantages in dealing with these risks. The best contract designs impose the risk on those most able to address or absorb it. I illustrate the potential gains from sink contracts with a range of conditions and contracts.climate, contracts, carbon credits, reforestation, projects

Time-varying Projected Dynamical Systems with Applications to Feedback Optimization of Power Systems

This paper is concerned with the study of continuous-time, non-smooth dynamical systems which arise in the context of time-varying non-convex optimization problems, as for example the feedback-based optimization of power systems. We generalize the notion of projected dynamical systems to time-varying, possibly non-regular, domains and derive conditions for the existence of so-called Krasovskii solutions. The key insight is that for trajectories to exist, informally, the time-varying domain can only contract at a bounded rate whereas it may expand discontinuously. This condition is met, in particular, by feasible sets delimited via piecewise differentiable functions under appropriate constraint qualifications. To illustrate the necessity and usefulness of such a general framework, we consider a simple yet insightful power system example, and we discuss the implications of the proposed conditions for the design of feedback optimization schemes

The Prerequisites for De-Institutionalization

[Excerpt] One of the main prerequisites of de-institutionalization for physically disabled people is an effective housing policy. A policy that entails non- discriminatory public works programs, non-discriminatory housing subsidies and non-discriminatory building codes. Non-discriminatory public works programs make sure that in all new construction which is financed and undertaken by any municipal, regional or state government agency barrier-free or universal design principles are enforced. This instrument does not require legislative changes. If the Regional Government of Tenerife, for example, were serious about accessibility in residential construction, they could start already tomorrow by including non-discrimination clauses together with operational definitions of accessibility in their procurement contracts; no bidder would receive a contract without guaranteeing full accessibility of the finished structures

Designing pro-poor water and sewer concessions : early lessons from Bolivia

The Bolivian government awarded a concession for water and sewer services in La Pazand El Alto in 1997. One goal of doing so was to expand in-house water and sewer service to low-income households. The author uses the Aguas del Illimani case to explore how the design of typical concession agreements (with monopoly private service suppliers) can affect outcomes in poor neighborhoods. She finds that outcomes in services can be affected by the concession contracts, by the contract bid process, by sector regulations, and by regulatory arrangements. To increase the likelihood of improvements in low-income areas, policymakers should: a) Make contract objectives clear and easily measurable. b) Eliminate policy barriers to serving the poor (including property title requirements and service boundaries that exclude poor neighborhoods). c) Design financial incentives consistent with service expansion or improved objectives for low-income areas. Contracts are subject to negotiation, so expansion or connection mandates alone do not guarantee that concessionaires will serve poor areas. Provisions and standards that reduce service options (for example, requirements that eliminate all alternatives to in-house connections) or restrict the emergence of new service providers (for example, granting exclusivity in the service area) could do more harm than good. In two years of operation, Aguas del Illimani met its first expansion mandate and tool many steps to facilitate income areas. The company and the Bolivian water regulator were willing to discuss and seek possible solutions to problems associated with servicing poor neighborhoods. It is too early to tell whether these gains will be sustainable or to predict how privatization will ultimately affect poor households in La Paz and El Alto.Water and Industry,Water Conservation,Sanitation and Sewerage,Environmental Economics&Policies,Health Economics&Finance,Urban Water Supply and Sanitation,Water and Industry,Water Conservation,Town Water Supply and Sanitation,Water Supply and Sanitation Governance and Institutions

Understanding the Economic Value of Legal Covenants in Investment Contracts: A Real-Options Approach to Venture Equity Contracts

Valuing early-stage high-technology growth-oriented companies is a challenge to current valuation methodologies. This inability to come up with robust point estimates of value should not and does not lead to a breakdown of market liquidity: instead, efforts are redirected towards the design of investment contracts which materially skew the distribution of payoffs in favor of the venture investors. In effect, limitations in valuation abilities are addressed by designing the investment contracts as baskets of real options instead of linear payoff functions. This paper investigates four common features (covenants) of venture capital investment contracts from a real option perspective, using both analytical solutions and numerical analyis to draw inferences for a better understanding of contract features. The impact of the concept for pricing issues, valuation negotiation and for contract design are considered. It is shown, for example, how "contingent pre-contracting" for follow-up rounds is theoretically a better proposition than the simple "rights of first refusal" commonly found in many contracts. We also provide for results (such as timing of investments, lengths of rounds, choices of liquidation levels, conversion levels) that take into account full interaction of the different features considered. We document some complex facts, such as the concavity of the VC contract value depending on the amount invested at the different stages, the actual share impact of the most common anti-dilution feature, some endogenous motivation for early VC exits from otherwise performing companies and stress overall the importance of a full analysis for efficient contract negotiations and understanding.

Pension schemes versus real estate

The demographic, economic and social changes that have characterized the last decades, and the dramatic financial crisis that has taken place since 2008, have led to a demand for structural changes in the pension sector and a growing interest in individual pension products. Hence the need, for most elderly people, to liquidate their fixed assets, which are usually the homes in which they live. This highlights products such as reverse mortgages and domestic reversibility plans. Within this context, we propose a contractual scheme where an immediate life annuity is obtained by paying a single-premium in the form of real estate rights (RERs), for example by transferring to an insurer the property title of a house or a similar realty, while keeping its usufruct or a restricted bundle of rights. The level of the installments depends on the fair value of the transferred RER at the contract’s issue, the life expectancy of the insured and the expected growth rate of the real estate market value. The contract design is developed by considering the control of the financial risk inherent in the contract itself, because of the prospective changes in the value of the RERs, and the level of the insurer’s leverage. Finally, we provide some numerical evidence of the proposed contractual structure, in order to compare the level of the installments according to the house return forecasts in different European countries

Contracts for Systems Design: Methodology and Application cases

Recently, contract based design has been proposed as an ”orthogonal” approach that can beapplied to all methodologies proposed so far to cope with the complexity of system design. Contract baseddesign provides a rigorous scaffolding for verification, analysis and abstraction/refinement. Companionreport RR-8759 proposes a unified treatment of the topic that can help in putting contract-based design in perspective.This paper complements RR-8759 by further discussing methodological aspects of system design withcontracts in perspective and presenting two application cases.The first application case illustrates the use of contracts in requirement engineering, an area of system designwhere formal methods were scarcely considered, yet are stringently needed. We focus in particular to thecritical design step by which sub-contracts are generated for suppliers from a set of different viewpoints(specified as contracts) on the global system. We also discuss important issues regarding certification inrequirement engineering, such as consistency, compatibility, and completeness of requirements.The second example is developed in the context of the Autosar methodology now widely advocated inthe automotive sector. We propose a contract framework to support schedulability analysis, a key step inAutosar methodology. Our aim differs from the many proposals for compositional schedulability analysisin that we aim at defining sub-contracts for suppliers, not just performing the analysis by parts—we knowfrom companion paper RR-8759 that sub-contracting to suppliers differs from a compositional analysis entirelyperformed by the OEM. We observe that the methodology advocated by Autosar is in contradiction withcontract based design in that some recommended design steps cannot be refinements. We show how tocircumvent this difficulty by precisely bounding the risk at system integration phase. Another feature ofthis application case is the combination of manual reasoning for local properties and use of the formalcontract algebra to lift a collection of local checks to a system wide analysis