Public Procurement in Times of Crisis: The Bundling Decision Reconsidered
4 Pages Posted: 14 Mar 2019
Date Written: 2013
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: Moral Hazard, Limited Liability, Procurement Contracts, Bundling, Public Goods Provision
JEL Classification: D86, L24, L33, H57, H12
Suggested Citation: Suggested Citation