Pairing provision price and default remedy: optimal two‐stage procurement with private R&D efficiency

Abstract

This article studies cost‐minimizing two‐stage procurement with Research and Development (R&D). The principal wishes to procure a product from an agent. At the first stage, the agent can conduct R&D to discover a more cost‐efficient production technology. First‐stage R&D efficiency and effort and the realized second‐stage production cost are the agent's private information. The optimal two‐stage mechanism is implemented by a menu of single‐stage contracts, each specifying a fixed provision price and remedy paid by a defaulting agent. A higher delivery price is paired with a higher default remedy, and a more efficient type opts for a higher price and higher remedy.

Learning by Consuming: Optimal Pricing with Endogenous Information Provision

“…Studies that also use this information order includes, for example,Johnson and Myatt (2006),Hoffmann andInderst (2011), andShi (2012).7 InLiu and Lu (2018), the second-stage type's distribution is also endogenous (determined by moral hazard), but it is ranked by FOSD.…”

An Empirical Model of R&D Procurement Contests: An Analysis of the DOD SBIR Program

“…44 Researchers have studied the effects of the level of competition (Taylor (1995), Fullerton and McAfee (1999), Che and Gale (2003), Koh (2017)), the reward structure (Moldovanu and Sela (2001), Cohen, Kaplan, and Sela (2008)), the number of stages (Moldovanu and Sela (2006)), and information sharing (Bhattacharya, Glazer, and Sappington (1990)). Che, Iossa, and Rey (2017) and Liu and Lu (2018) model the prize as a procurement contract and add asymmetric information; the latter focuses on the single‐agent case. Cabral, Cozzi, Denicoló, Spagnolo, and Zanza (2006) and Williams (2012) provide surveys. …”

Sequential versus static screening: An equivalence result

“…More precisely, we identify conditions for which the sequential screening problem is not regular, but the corresponding static screening problem can be solved with wellknown techniques from static screening. 2 1 For applications of sequential screening models, see Dai et al (2006), Esö and Szentes (2007a, b), Hoffmann and Inderst (2011), Nocke et al (2011), Strausz (2011, 2015a, b), Inderst and Peitz (2012), Bergemann and Wambach (2014), Deb and Said (2014), Liu and Lu (2015), Li and Shi (2015). For a textbook treatment, see Krähmer and Strausz (2015c).…”