Competitive contracts with productive information gathering

Abstract

In this paper, we study competition for procurement contracts with information gathering when there are two potential agents. The agents can acquire information about their private production costs after the contracts are announced and before production begins. We prove that, generically the separation property (Riordan and Sappington in Am Econ Rev 77(3):375–387, 1987), which states that production distortions are independent of the number of agents, does not hold. Compared to the case with one agent, the effect of competition on agents’ incentive for information gathering can be positive or negative. On one hand, there is the competition effect, which alleviates the incentive to shirk on information gathering. On the other hand, the competition effect reduces the expected rent for each agent, thus discouraging the agents from gathering information. When the cost of information gathering is small, the first (positive) effect dominates, and competition leads to a greater distortion in the output schedule. In contrast, when the cost of information gathering is large, the second (negative) effect dominates, and competition leads to a smaller distortion in the output schedule.