Should we base procurement rules on the competition of linear incentive contracts ?

Abstract

The study of optimal procurement contracts under informational asymmetries generally assumes that the cost disturbance affecting contractor's cost function is not observed by the principal. We assume here that this variable (which may represent environmental or geology conditions...) can be observed in the process of the contract. Thus, the principal is now able to make the payment contingent on the realization of this variable. In this context, the aim of this paper is to compare a linear incentive contract with a "modified" fixed-price contract, which allows the payment to the selected contractor to be independent upon his bid in the case of a high-cost value of exogenous uncertainty.procurement bidding; linear incentive contracts; fixed-price contract