Moral Hazard, Incentive Contracts, and Risk: Evidence from Procurement

• Gregory Lewis ^[1] ; Patrick Bajari ^[2]
  1. [1] Harvard University

     Harvard University

     City of Cambridge, Estados Unidos

     
  2. [2] University of Washington

     University of Washington

     Estados Unidos

     
• Localización: Review of economic studies, ISSN 0034-6527, Vol. 81, Nº 3, 2014, págs. 1201-1228
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • Deadlines and late penalties are widely used to incentivize effort. Tighter deadlines and higher penalties induce higher effort, but increase the agent's risk. We model how these contract terms affect the work rate and time-to-completion in a procurement setting, characterizing the efficient contract design. Using new micro-level data on Minnesota highway construction contracts that includes day-by-day information on work plans, hours worked and delays, we find evidence of ex post moral hazard: contractors adjust their effort level during the course of the contract in response to unanticipated productivity shocks, in a way that is consistent with our theoretical predictions. We next build an econometric model that endogenizes the completion time as a function of the contract terms and the productivity shocks, and simulate how commuter welfare and contractor costs vary across different terms and shocks. Accounting for the traffic delays caused by construction, switching to a more efficient contract design would increase welfare by 22.5% of the contract value while increasing the standard deviation of contractor costs—a measure of risk—by less than 1% of the contract value.