Incentive Contracts and Competitive Bidding

Abstract

An increasing segment of economic activity is taking place in nonmarket situations in which economic agents act outside the traditional markets or create markets to deal with specific resource allocation problems. One such problem involves the selection by a buyer of a contractor using a competitive bidding process. Competitive bidding is used extensively by the government for the selection of suppliers of goods and services and for the sale of resources such as offshore oil leases. Firms may use competitive bidding for the selection of certain suppliers of factor inputs and may attempt to sell certain products in markets in which competitive price quoting is the established market mechanism. This paper is concerned with a bidding process in which a firm has an opportunity to bid on a project under the terms of an incentive contract. Incentive contracts

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