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ABSTRACT

Experimental evidence and a host of recent theoretical ideas take aim at the common economic assumption that individuals are selfish. The arguments made suggest that intrinsic “social preferences” of one kind or another are at the heart of unselfish, pro-social behavior that is often observed. I suggest an alternative motive based on “shame” that is imposed by the extrinsic beliefs of others, which is distinct from the more common approaches to social preferences such as altruism, a taste for fairness, reciprocity, or self-identity perception. The motives from shame are consistent with observed behavior in previously studied experiments, but more importantly, they imply new testable predictions. A new set of experiments confirm both that shame is a motivator, and that trusting players are strategically rational in that they anticipate the power of shame. Some implications for policy and strategy are discussed. JEL classifications C72, C91, D82

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ABSTRACT

Public and private sector procurement contracts are often incomplete because the initial plans and specifications of the procured goods or services are changed and refined after the contract is awarded to the winning bidder. As a result, final costs differ from the winning bid and may include significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates reinforce the reduced form analysis and suggest that adaptation costs, on average, account for about ten percent of the winning bid. The profit markups from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison. JEL classification D23, D82, H57, L14, L22, L74.

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ABSTRACT

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ABSTRACT

Consider a principal-agent relationship where a signal is available after the agent's choice of effort and renegotiation is possible after the signal is realized. The agent always observes the signal due to the nature of his job, while the principal can choose whether to observe the signal. We find that the sufficient statistic result of the standard principal-agent theory does not hold: Optimal contracts may not include valuable information about the agent's effort. In particular, when the signal is sufficiently informative about output the principal may choose not to observe the signal, thus creating endogenous asymmetric information and committing herself not to fully insure the agent at the renegotiation stage.