Regulation, Deregulation, Reregulation
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Regulation, Deregulation, Reregulation

Institutional Perspectives

Edited by Claude Ménard and Michel Ghertman

Building on Oliver Williamson’s original analysis, the contributors introduce new ideas, different perspectives and provide tools for better understanding changes in the approach to regulation, the reform of public utilities, and the complex problems of governance. They draw largely upon a transaction cost approach, highlighting the challenges faced by major economic sectors and identifying critical flaws in prevailing views on regulation. Deeply rooted in sector analysis, the book conveys a central message of new institutional economics: that theory should be continuously confronted by facts, and reformed or revolutionized accordingly.
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Chapter 4: Incentives and Transaction Costs in Public Procurement

Steven Tadelis


Steven Tadelis INTRODUCTION Standardized goods, such as computers, office supplies and automobiles are mass produced, have standard characteristics and are typically purchased at list price from a menu of prespecified characteristics. Custom made goods, such as new buildings, custom-software or legal services are tailored to fit a buyer’s specific and often unique needs. To procure these customized goods, the buyer usually hires a contractor who supplies the good or service according to a set of desired specifications, referred to as the procurement problem. The procurement problem has attracted much attention both in policy and in academic circles. The main focus of academic economists has been on procurement by the public sector, in part because of its sheer importance to the economy. For example, procurement by federal, state and local government accounts for more than 10 percent of gross domestic product in the United States. When considering the procurement of goods and services, the buyer is faced with many challenges. First, she has to choose what exactly should be procured, and how to transmit her needs to the potential suppliers. Second, a contract must be laid out that includes contractual obligations and methods of compensation. Third, the buyer needs to decide how to award the procurement contract between the potential suppliers. Finally, the award mechanism should result in the selection of a qualified and desirable supplier and in the implementation of a cost-effective final product. Procurement is often achieved with the buyer seeking, through competitive bidding, a low price to purchase...

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