Report
Contract efficiency in the presence of demand and cost uncertainty
Melbourne Institute working paper; no. 1/05, Melbourne Institute of Applied Economic and Social Research
2005
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Abstract
Standard formulations of procurement contract problems analyse the tension between providing performance incentives while allocating risk appropriately. The standard model examines this problem in the context of procuring a single indivisible good that is easily defined but is characterised by uncertainty in the cost of production. In many real-world contracts, however, the procurement environment looks rather different. In this article, we examine contract efficiency in a complex contractual environment for services characterized by cost uncertainty and an unknown level of service provision. Using data on water and sewerage network maintenance services contracts from two Melbourne water retailers, we compare the expenditure across fixed-price and cost-plus service contracts. The results suggest that the fixed-price contracts outperform the cost-plus contracts, thereby confirming the standard result that efficient contracts trade-off risk for incentives.
Details
- Title
- Contract efficiency in the presence of demand and cost uncertainty
- Creators
- Paul H Jensen - University of MelbourneRobin E Stonecash - Australian Graduate School of Management, Universities of Sydney and New South Wales
- Series
- Melbourne Institute working paper; no. 1/05
- Publisher
- Melbourne Institute of Applied Economic and Social Research; Parkville, Victoria
- Number of pages
- 27 pages
- Identifiers
- 9780734031778; 991012878000002368
- Academic Unit
- School of Business and Tourism; National Centre for Flood Research; Management; Faculty of Business, Law and Arts
- Language
- English
- Resource Type
- Report