Optimal procurement contracts under a binding budget constraint

The traditional literature on agency models predicts that, for zero liabili ty contracts, it is optimal for the principal to pay for the information he cannot observe. However, this principle is not valid for a set of contract s mostly used by government agencies whose distinguishing feature is repres ented by a stringent budget constraint for the principal. This paper shows that in this environment the principal will either choose a structure exibi ting pooling or a bargaining solution. The bargaining solution represents t he analytical proof to the intuition of the difficulty in implementing proc urement contracts stated by Laffont and Tirole (1993).