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Contracting inside an organization: An experimental study

Published online by Cambridge University Press:  14 March 2025

Paul J. Healy ,
John O. Ledyard ,
Charles Noussair ,
Harley Thronson ,
Peter Ulrich  and
Giulio Varsi
Paul J. Healy*
Affiliation:
Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213
John O. Ledyard*
Affiliation:
Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125
Charles Noussair*
Affiliation:
Department of Economics, Emory University, Atlanta, GA 30322-2240
Harley Thronson*
Affiliation:
Office of Space Science, NASA Headquarters, Washington, DC
Peter Ulrich*
Affiliation:
Office of Space Science, NASA Headquarters, Washington, DC
Giulio Varsi*
Affiliation:
Office of Space Science, NASA Headquarters, Washington, DC
*
e-mail: phealy@cmu.edu
e-mail: jledyard@hss.caltech.edu
e-mail: cnoussa@emory.edu
e-mail: hthronso@hq.nasa.gov
e-mail: pjulrich@radix.net
e-mail: gvarsi@hq.nasa.gov
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Abstract

In this paper we propose and test a contracting mechanism, Multi-Contract Cost Sharing (MCCS), for use in the management of a sequence of projects. The mechanism is intended for situations where (1) the contractor knows more about the true costs of various projects than does the contracting agency (adverse selection), and (2) unobservable effort on the part of the contractor may lead to cost reductions (moral hazard). The proposed process is evaluated in an experimental environment that includes the essential economic features of the NASA process for the acquisition of Space Science Strategic missions. The environment is complex and the optimal mechanism is unknown. The design of the MCCS mechanism is based on the optimal contract for a simpler related environment. We compare the performance of the proposed process to theoretical benchmarks and to an implementation of the current NASA ‘cost cap’ procurement process. The data indicate that the proposed MCCS process generates significantly higher value per dollar spent than using cost caps, because it allocates resources more efficiently among projects and provides greater incentives to engage in cost-reducing innovations.

Keywords

Mechanism designCost sharingMoral hazardNASA

JEL classification

L32: Public Enterprises • Public-Private Enterprises C92: Laboratory, Group Behavior C72: Noncooperative Games D82: Asymmetric and Private Information • Mechanism Design

Information

Type
Research Article
Information
Experimental Economics , Volume 10 , Issue 2 , June 2007 , pp. 143 - 167
Copyright
Copyright © 2006 Economic Science Association

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Footnotes

Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9137-x.

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