Contracting inside an organization: An experimental study

In this paper we propose and test a contracting mechanism, Multi-Contract Cost Sharing (MCCS), for use in the management of a sequence of projects. The mechanism is intended for situations where (1) the contractor knows more about the true costs of various projects than does the contracting agency (adverse selection), and (2) unobservable effort on the part of the contractor may lead to cost reductions (moral hazard). The proposed process is evaluated in an experimental environment that includes the essential economic features of the NASA process for the acquisition of Space Science Strategic missions. The environment is complex and the optimal mechanism is unknown. The design of the MCCS mechanism is based on the optimal contract for Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9137-x. P. J. Healy ( ) Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213 e-mail: [email protected] J. O. Ledyard Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125 e-mail: [email protected] C. Noussair Department of Economics, Emory University, Atlanta, GA 30322-2240 e-mail: [email protected] H. Thronson . P. Ulrich . G. Varsi Office of Space Science, NASA Headquarters, Washington, DC e-mail: [email protected] P. Ulrich e-mail: [email protected] G. Varsi e-mail: [email protected]