Contract Delegation with Bargaining

By Theilen, Bernd | Economic Inquiry, January 2013 | Go to article overview

Contract Delegation with Bargaining


Theilen, Bernd, Economic Inquiry


I. INTRODUCTION

Public procurement is a very important part of economic activity. It accounts for about 20% of gross domestic product (GDP) in the United States and 16% in the European Union (EU) countries. (1) Therefore, it is not surprising that many interest groups are at the stake whenever aspects of public procurement procedures are discussed. To limit the influence of these groups, the purpose of legislation in the United States and the European Community has been to unify public procurement procedures and restrict the discretionary power of contracting officers and agencies at lower administrative levels. The Federal Acquisition Regulation (FAR) in 2005 in the United States and directive 2004/18/EC of the European Parliament in 2004 are examples of this.

One of the most important aspects in public procurement is the extent to which subcontracting is allowed. Traditionally, subcontracting has been judged negatively. For example, in construction, which amounts to a substantial part of public procurement, the FAR prevents contracts from being awarded to a single firm that supplies both design and engineering services (i.e., it requires contract centralization). However, recently most states have legislations that allow for exceptions like the use of the design-build method (i.e., they allow contract decentralization). Lam, Chan, and Chan (2006) report that nowadays more than one-third of the construction projects in the United States and up to 50% in Japan use the design-build approach. Economic theory should explain whether this is because of the increased influence of pressure groups or if there exists an economic rational for this tendency.

However, economic theory has had difficulty in explaining the superiority of subcontracting. To see this, consider a general contractor (or principal) who needs two suppliers (or agents) to realize a project. Either, he/she can contract directly both of them, or contract only one supplier and let him/her subcontract the other. Subcontracting obviously implies a loss of control over the subcontractee's contract for the general contractor. However, because he/she can always replicate the same contracts if he/she contracts directly with both suppliers, it is not easy to see the advantages of subcontracting. A common assumption in this literature is that the principal has all the bargaining power and can make a "take it or leave it" offer to the agent. Regarding public procurement this is a realistic assumption in cases in which there are many suppliers, but it fails to apply in cases in which the principal only can choose among a small number of suppliers. For example, this is the case in public procurement of defense systems, aeronautic and space equipment, or specific construction facilities such as water depuration plants, airports, or electric power plants.

Although procurement in these cases is also based on fixed-price, cost-reimbursement, and incentive contracts, usually it also allows for negotiations. So, section 15.3 of FAR states that "negotiations are exchanges, in either a competitive or sole source environment, between the Government and offerors, that are undertaken with the intent of allowing the offeror to revise its proposal. These negotiations may include bargaining. Bargaining includes persuasion, alteration of assumptions and positions, give-and-take, and may apply to price, schedule, technical requirements, type of contract, or other terms of a proposed contract." This means that economic theory should take into account that contract design includes bargaining between parties at some stage of the process when contract centralization and decentralization are compared.

To analyze this issue, a very stylized model is used to examine the advantages of centralized and decentralized organizations. Two agents work jointly on a project for a principal. Usually, in public procurement this is a contracting officer who represents a public agency. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Contract Delegation with Bargaining
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.