MORAL HAZARD AND ADVERSE SELECTION IN PROCUREMENT CONTRACTING

A model of procurement contracting is developed and tested in laborato ry experiments. Market performance results are presented for both fixe d-price and cost-sharing contracts. Contracts are awarded with first-p rice sealed-bid or second-price sealed-bid auctions. The environment c ontains post-auction cost uncertainty and opportunity for unmonitored effort in contract cost reduction. Cost-sharing contracts are found to reduce procurement expense but also to be inefficient because of thei r induced moral hazard waste and cost overruns. (C) 1996 Academic Pres s, Inc.