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Optimal procurement and contracting with research and development


Tan, Guofu (1990) Optimal procurement and contracting with research and development. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/ccg7-br11.


Government procurement of a new good or service is a process that usually includes basic research, development, and production. Empirical evidences indicate that investments in research and development (R and D) before production are significant in many defense procurements. Thus, optimal procurement policy should not be only to select the most efficient producer, but also to induce the contractors to design the best product and to develop the best technology. It is difficult to apply the current economic theory of optimal procurement and contracting, which has emphasized production, but ignored R and D, to many cases of procurement.

In this thesis, I provide basic models of both R and D and production in the procurement process where a number of firms invest in private R and D and compete for a government contract. R and D is modeled as a stochastic cost-reduction process. The government is considered both as a profit-maximizer and a procurement cost minimizer. In comparison to the literature, the following results derived from my models are significant. First, R and D matters in procurement contracting. When offering the optimal contract the government will be better off if it correctly takes into account costly private R and D investment. Second, competition matters. The optimal contract and the total equilibrium R and D expenditures vary with the number of firms. The government usually does not prefer infinite competition among firms. Instead, it prefers free entry of firms. Third, under a R and D technology with the constant marginal returns-to-scale, it is socially optimal to have only one firm to conduct all of the R and D and production. Fourth, in an independent private values environment with risk-neutral firms, an informed government should select one of four standard auction procedures with an appropriate announced reserve price, acting as if it does not have any private information.

Item Type:Thesis (Dissertation (Ph.D.))
Subject Keywords:Social sciences, Optimal procurement, development
Degree Grantor:California Institute of Technology
Division:Humanities and Social Sciences
Major Option:Social Science
Thesis Availability:Public (worldwide access)
Research Advisor(s):
  • Ledyard, John O.
Thesis Committee:
  • McKelvey, Richard D.
  • Palfrey, Thomas R.
  • Border, Kim C.
Defense Date:9 May 1990
Record Number:CaltechTHESIS:07292014-111212753
Persistent URL:
Default Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:8620
Deposited By: Dan Anguka
Deposited On:29 Jul 2014 21:12
Last Modified:09 Nov 2022 19:20

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