| Further issues of optimal contract design are explored extending the work of Brown (1986, 1987). Within the context of sole-source procurement contracting, the use of GAMS (a mathematical programming modelling language) to design profit arrangements under conditions of multiple adverse selection is developed. Various cases are analyzed in order to distinguish and hopefully better understand interacting effects of multiple adverse selection. The results in Chapters 2 and 3 show how the government's preference of one type of a contractor over another type changes as uncertainty about observable variables (i.e., product value and cost) and a contractor's possible types changes.;In addition, GAMS also was utilized to generate numerical examples demonstrating the effects of uncertainty of risk-aversion on optimal assignment of prime contractor versus subcontractor. The results show that when the government faces a choice between two contractors with the same expected risk-averse coefficients but different variances of risk-averse coefficients (or with the same variances of risk-averse coefficients but different expected risk-averse coefficients), the government would prefer the contractor who has less variance of risk-averse coefficient (or less expected risk-averse coefficient) for the prime contractor.;The prime contractor's profit is decreasing not only in her own costs, but also in the subcontractor's costs, whereas the subcontractor's profit is decreasing in his own costs. Thus, a contract contingent on the prime and subcontractor's costs helps motivate the prime contractor not only to reduce her own costs, but also to reduce the subcontractor's moral hazard problem about cost-reduction efforts. |
