Hostname: page-component-7b9c58cd5d-dlb68 Total loading time: 0 Render date: 2025-03-15T22:16:16.114Z Has data issue: false hasContentIssue false
  • English
  • Français

Contracting inside an organization: An experimental study

Published online by Cambridge University Press:  14 March 2025

Paul J. Healy ,
John O. Ledyard ,
Charles Noussair ,
Harley Thronson ,
Peter Ulrich  and
Giulio Varsi
Paul J. Healy*
Affiliation:
Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213
John O. Ledyard*
Affiliation:
Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125
Charles Noussair*
Affiliation:
Department of Economics, Emory University, Atlanta, GA 30322-2240
Harley Thronson*
Affiliation:
Office of Space Science, NASA Headquarters, Washington, DC
Peter Ulrich*
Affiliation:
Office of Space Science, NASA Headquarters, Washington, DC
Giulio Varsi*
Affiliation:
Office of Space Science, NASA Headquarters, Washington, DC
*
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

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 Strategic 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.

Keywords

Mechanism designCost sharingMoral hazardNASA

JEL classification

L32: Public Enterprises • Public-Private Enterprises C92: Laboratory, Group Behavior C72: Noncooperative Games D82: Asymmetric and Private Information • Mechanism Design
Type
Research Article
Information
Experimental Economics , Volume 10 , Issue 2 , June 2007 , pp. 143 - 167
Copyright
Copyright © 2006 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9137-x.

References

Bajari, P., & Tadelis, S. (1999). Incentives versus transaction costs: A theory of procurement contracts. The RAND Journal of Economics, 32(3), 387–407.CrossRefGoogle Scholar
Banks, J., Ledyard, J., & Porter, D. (1989). Allocating uncertain and unresponsive resources: An experimental approach. The RAND Journal of Economics, 20(1), 1–25.CrossRefGoogle ScholarPubMed
Binmore, K., & Klemperer, P. (2002). The biggest auction ever: The sale of the British 3Gtelecomlicenses. The Economic Journal, 112, C74–C96.CrossRefGoogle Scholar
Bohm, P., & Carlen, B. (1999). Emission quota trade among the few: Laboratory evidence of joint implementation among committed countries. Resource and Energy Economics, 21(1), 43–66.CrossRefGoogle Scholar
Brewer, P. J., & Plott, C. R. (1996). A Binary conflict ascending price (BICAP) Mechanism for the decentralized allocation of the right to use railroad tracks. International Journal of Industrial Organization, 14(6), 857–886.CrossRefGoogle Scholar
Cason, T., & Tenorio, R. (2002). To spin or not to spin? Natural and laboratory experiments from ‘the price is right’. The Economic Journal, 112, 170–195.Google Scholar
Chen, Y, & Sönmez, T. (2005). School choice: An experimental study. Journal of Economic Theory, forthcoming.Google Scholar
Cooper, D., Kagel, J., Lo, W., & Gu, Q. (1999). Gaming against managers in incentive systems: Experimental results with chinese students and chinese managers. American Economic Review, 89(4), 781–804.CrossRefGoogle Scholar
Cox, J. C., Isaac, R. M., Cech, P., & Conn, D. (1996). Moral hazard and adverse selection in procurement contracting. Games and Economic Behavior, 17, 147–176.CrossRefGoogle Scholar
Davis, D., & Wilson, B. J. (2005). Differentiated product competition and the Antitrust Logit Model: An experimental analysis. Journal of Economic Behavior & Organization, 57(1), 89–113.CrossRefGoogle Scholar
Deneckere, R., & Severinov, S. (2003). Mechanism design and communication costs. Fuqua School of Business, Duke University manuscript.Google Scholar
Green, J. R., & Laffont, J.-J. (1987). Limited communication and incentive compatibility. In Groves, T., Radner, R., & Reiter, S. (Eds.), Information, incentives, & economic mechanisms. Minneapolis: University of Minneapolis Press.Google Scholar
Grether, D., Isaac, R. M., & Plott, C. R. (1981). The allocation of landing rights by unanimity among competitors. American Economic Review, 71(2), 166–171.Google Scholar
Haruvy, E., Roth, A. E., & Unver, M. (2005). The dynamics of law clerk matching: An experimental and Computational investigation of proposals for reform of the market. Journal of Economic Dynamics and Control, forthcoming.Google Scholar
Healy, P., & Noussair, C. (2003). Bidding behavior in the price is right game: An experimental study. Journal of Economic Behavior and Organization, forthcoming.Google Scholar
Holt, C., & Laury, S. (2002). Risk aversion and incentive effects. American Economic Review, forthcoming.CrossRefGoogle Scholar
Hong, J., & Plott, C. R. (1982). Rate filing policies for inland water transportation: An experimental approach. Bell Journal of Economics, 13, 1–19.CrossRefGoogle Scholar
Kachelmeier, S., & Shehata, M. (1992). Examining risk preferences under high monetary incentives: Experimental evidence from the People's Republic of China. American Economic Review, 82(5), 1120–1141.Google Scholar
King, R., Smith, V., Williams, A., & Van Boening, M. (1993). The robustness of bubbles and crashes in experimental stock markets. In Prigogine, I., Day, R., & Chen, P. (Eds.), Nonlinear dynamics and evolutionary economics. Oxford University Press.Google Scholar
Laffont, J., & Tirole, J. (1986). Using cost observation to regulate firms. Journal of Political Economy, 94, 614–641.CrossRefGoogle Scholar
Laffont, J., & Tirole, J. (1993). A theory of incentives in procurement and regulation. Cambridge, MA, USA: The MIT Press.Google Scholar
Ledyard, J., Porter, D., & Wessen, R. (2000). A market-based mechanism for allocating space shuttle secondary payload priority. Experimental Economics, 2(3), 173–195.CrossRefGoogle Scholar
Ledyard, J., Noussair, C., & Porter, D. (1996). The allocation of a shared resource within an organization. Economic Design, 2(2), 163–192.CrossRefGoogle Scholar
McAfee, R. P., & McMillan, J. (1986). Bidding for contracts: A principal agent analysis. RAND Journal of Economics, 17, 326–338.CrossRefGoogle Scholar
Muller, R. A., & Mestleman, S. (1998). What have we learned from emissions trading experiments? Managerial and Decision Economics, 19, 225–238.3.0.CO;2-V>CrossRefGoogle Scholar
Noussair, C., & Porter, D. (1992). Allocating priority with auctions: an experimental analysis. Journal of Economic Behavior and Organization, 169–195.CrossRefGoogle Scholar
Polk, C. (1994) Subcomponent innovation and moral hazard: Where technological progress meets the division of labor. California Institute of Technology Social Science working paper #895.Google Scholar
Reichelstein, S. (1992). Constructing incentive schemes for government contracts: An application of agency theory. The Accounting Review, 712–731.Google Scholar
Roth, A. E., & Peranson, E. (2002). The redesign of the matching market for American physicians: Some engineering aspects of economic design. Game Theory in the Tradition of Bob Wilson, Chapter 16.Google Scholar
Roth, A. E., Sönmez, T., & Unver, M. U. (2004). Kidney exchange. Quarterly Journal of Economics, 119, 457–488.CrossRefGoogle Scholar
Smith, V., & Walker, J. (1993). Rewards, experience and decision costs in first-price auctions. Economic Inquiry, 31, 237–244.CrossRefGoogle Scholar
U.S. Army (2001). Innovation in Contractual Incentives: Phase 1 Report.Google Scholar
Supplementary material: File

Healy et al. supplementary material

Healy et al. supplementary material
Download Healy et al. supplementary material(File)
File 2.2 MB