Team Production with Adverse Selection and Moral Hazard

Abstract: The main challenge in team production is that individual actions are often unobserved, incentivizing team members to exploit their private information and free-ride at the team's expense. To address this problem, this paper formulates and solves a model of team production with adverse selection and moral hazard. It examines a team partitioned into two groups. Within the team, there is an informed agent with private information about a productivity parameter that dictates first-best actions. The informed agent reports the productivity parameter to the team. Based on the report, each agent takes a non-observable action at a private cost. Each group produces an observable outcome, and the sum of these two outcomes constitutes a joint outcome allocated among the agents. Assuming agents have unlimited liability, the main results demonstrate that there exist budget-balanced sharing rules that induce truthful reporting and first-best actions. These results establish that partitioning a team into two groups is sufficient to achieve efficiency, obviating the need for additional information about agents' actions.

Incomplete Contracts and Renegotiations in a Procurement Auction

Abstract: Contracts to execute projects are often incomplete and subject to renegotiation after being allocated. This paper analyzes a model in which a government uses a second-price procurement auction to allocate an incomplete contract to execute a project. Before submitting bids, bidders anticipate a future renegotiation of the initial contract with positive probability. In renegotiation, either the government or the winning bidder randomly makes a take-it-or-leave-it (TIOLI) offer. The main result demonstrates that the winning bidder's probability of making the TIOLI offer determines both the bidding behavior and the efficiency of the procurement auction. If this probability is high, the equilibrium is separating and the procurement auction is efficient. Conversely, if this probability is low, the equilibrium is pooling. In this case, bidders submit the same bid to extract renegotiation rents. This strategic behavior renders the procurement auction inefficient, as the contract is not necessarily allocated to the bidder with the lowest expected cost.