PROCUREMENT POLICY AND CONTRACTING EFFICIENCY

The contracting literature has emphasized the optimality of using cert ain contracting instruments, such as multiple cost observations, full commitment, self selection and competition. A two-period procurement m odel is constructed incorporating all of the instruments and optimal c ontracts are characterized. Numerical examples suggest that the margin al benefits of full commitment, self selection and multiple cost obser vations are small while the benefits of competition are larger. To obt ain some evidence on contracting costs, defense contracting is reviewe d. It indicates that using these instruments is very costly, thus call ing into question the optimality of using all of the procurement instr uments.