Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78390
Authors: 
Bös, Dieter
Lülfesmann, Christoph
Year of Publication: 
2001
Series/Report no.: 
Bonn Econ Discussion Papers 28/2001
Abstract: 
This paper investigates a procurement relationship between a welfare-oriented government and a private supplier. The agents face several versions of the trading good which differ in quality and production costs, and the differences between those items are undescribable ex ante. In presence of this `quality-choice problem', no initial contract may induce efficient cost-reducing investments of the supplier. In contrast, a first-best result is always attainable in private procurement where the buyer maximizes profit rather than welfare. We identify the government's welfare objective as its Achilles' heel: equilibrium trade prices differ in public and private procurement, and private governance can lead to more efficient investment decisions even though renegotiation ensures the ex-post efficient trade decision in either regime.
Subjects: 
Procurement
Incomplete Contracts
Quality Choice
Governance Structure
JEL: 
D23
K12
L23
Document Type: 
Working Paper

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