Working Paper: CEPR ID: DP9676
Authors: Patrick W. Schmitz
Abstract: The government wants two tasks to be performed. In each task, unobservable effort can be exerted by a wealth-constrained private contractor. If the government faces no binding budget constraints, it is optimal to bundle the tasks. The contractor in charge of both tasks then gets a bonus payment if and only if both tasks are successful. Yet, if the government has only a limited budget, it may be optimal to separate the tasks, so that there are two contractors each in charge of one task. In this case, high efforts in both tasks can be implemented with smaller bonus payments.
Keywords: bundling; limited liability; moral hazard; procurement contracts; public goods provision
JEL Codes: D86; H12; H57; L24; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Budget Constraints (D10) | Bundling Decision (L14) |
| Bundling Decision (L14) | Contractor Effort (L74) |
| Budget Constraints (D10) | Task Separation (Y80) |
| Task Separation (Y80) | Contractor Effort (L74) |
| Bundling Decision (L14) | Expected Payoff for Principal (G19) |
| Task Separation (Y80) | Payments Structure (D49) |