Incentives and Adaptation: Evidence from Highway Procurement in Minnesota

Gregory Lewis, Patrick Bajari

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

Procurement projects often encounter unanticipated problems. Deadlines and penalties are one important instrument used to incentivize contractors to adapt their plans. We develop a theory of highway procurement in which contractors must modify their construction rate following a productivity shock. We model how time incentives affect the work rate and time taken, characterizing the efficient contract design. Using new micro-level data from Minnesota that includes day-by-day information on work plans, actual outcomes and delays, we find strong evidence supporting the theory. As an application, we build an econometric model that endogenizes adaptation, 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 risk.

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An online appendix is available for this publication.

Acknowledgments

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