Contracting inside an organization: An experimental study

Paul J. Healy, John O. Ledyard, Charles Noussair, Harley Thronson, Peter Ulrich, Giulio Varsi

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

In this paper we propose and test a contracting mechanism, Multi-Contract Cost Sharing (MCCS), for use in the management of a sequence of projects. The mechanism is intended for situations where (1) the contractor knows more about the true costs of various projects than does the contracting agency (adverse selection), and (2) unobservable effort on the part of the contractor may lead to cost reductions (moral hazard). The proposed process is evaluated in an experimental environment that includes the essential economic features of the NASA process for the acquisition of Space Science Strategy missions. The environment is complex and the optimal mechanism is unknown. The design of the MCCS mechanism is based on the optimal contract for a simpler related environment. We compare the performance of the proposed process to theoretical benchmarks and to an implementation of the current NASA 'cost cap' procurement process. The data indicate that the proposed MCCS process generates significantly higher value per dollar spent than using cost caps, because it allocates resources more efficiently among projects and provides greater incentives to engage in cost-reducing innovations.

Original languageEnglish (US)
Pages (from-to)143-167
Number of pages25
JournalExperimental Economics
Volume10
Issue number2
DOIs
StatePublished - Jun 2007
Externally publishedYes

Keywords

  • Cost sharing
  • Mechanism design
  • Moral hazard
  • NASA

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

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