The Design of Procurement Contracts

Abstract

This paper investigates the interaction between bidding for procurementprograms and fractional buys. This problem is analyzed from the standpoint of a cost-minimizing procuring agent. It is shown that underimperfect competition, a multiple-source purchase is generally preferred to a single-source contract. Similarly, the author demonstrates that a (strictly) intermediate cost sharing arrangement,i.e., an incentive contract, dominates either the cost-plus or the firm-fixed price arrangements. Copyright 1986 by American Economic Association.

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