NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Moral Hazard, Incentive Contracts and Risk: Evidence from Procurement

Gregory Lewis, Patrick Bajari

NBER Working Paper No. 17647
Issued in December 2011
NBER Program(s):   IO   LE   PE

Deadlines and penalties are widely used to incentivize effort. We model how these incentive contracts affect the work rate and time taken 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 actually worked and delays, we find evidence of moral hazard. As an application, we build an econometric model that endogenizes the work rate, and simulate how different incentive structures affect outcomes and the variance of contractor payments. Accounting for the traffic delays caused by construction, switching to a more efficient design would substantially increase welfare without substantially increasing the risk borne by contractors.

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A data appendix is available at http://www.nber.org/data-appendix/w17647

This paper was revised on August 23, 2013

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17647

Moral Hazard, Incentive Contracts and Risk: Evidence from Procurement (with Patrick Bajari), forthcoming in Review of Economic Studies

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