Optimal monitoring in dynamic procurement contracts

Abstract

Innovation partnerships are a public procurement procedure in the European Union which allows public authorities to bundle the development and supply of innovative goods in a single procurement project. I study optimal monitoring strategies for public authorities in innovation partnerships using a principal–agent model with dynamic adverse selection and moral hazard. I show that monitoring of investments in innovation can be substituted by monitoring of exogenous cost factors that become known during the production phase. Thus, innovation partnerships may also be beneficial instruments if innovative activity is hard to monitor.