TY  - JOUR
AU  - Lewis,Gregory
AU  - Bajari,Patrick
TI  - Incentives and Adaptation: Evidence from Highway Procurement in Minnesota
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17647
PY  - 2011
Y2  - December 2011
UR  - http://www.nber.org/papers/w17647
L1  - http://www.nber.org/papers/w17647.pdf
N1  - Author contact info:
Gregory Lewis
Department of Economics
Harvard University
125 Littauer Center
1805 Cambridge Street
Cambridge, MA 02138
Tel: 617/496-1526
Fax: 617/495-8570
E-Mail: glewis@fas.harvard.edu

Patrick Bajari
University of Washington
331 Savery Hall
UW Economics Box 353330
Seattle, Washington 98195-3330
E-Mail: Bajari@uw.edu
AB  - 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.
ER  -