SFB 303 Discussion Paper No. A-457

Author: Bös, Dieter, and Christoph Lülfesmann
Title: The Hold-up Problem in Government Contracting
Abstract: This paper considers a two-period procurement model in an incomplete-contract framework. In contrast to Hart-Moore (1988), the welfare-maximizing government, as buyer, is able to accomplish ex-ante optimal contracts which guarantee first-best specific investments of both buyer and seller. These contracts are precisely characterized. Regardless of the underlying supports of cost and benefit distributions renegotiation inevitably occurs in some states of nature. This renegotiation always increases the ex-ante fixed trade price. Hence, the empirical observation of soft budget constrains in government contracting can be rationalized. Furthermore, in accordance with common beliefs, the seller's rents accrue only at production stage.
Keywords: Procurement, Incomplete Contracts, Soft Budget Constrains
JEL-Classification-Number: D23, H57, L51
Creation-Date: April 1995
URL: ../1995/a/bonnsfa457.pdf

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