On the Choice of the Sharing Fraction for Incentive Contracting
- 1 January 1988
- journal article
- research article
- Published by Taylor & Francis in The Engineering Economist
- Vol. 33 (3) , 181-190
- https://doi.org/10.1080/00137918808966953
Abstract
Under incentive contracting, a private firm agrees to do work for the government or another private firm in such a way that the two parties Jointly share the gain or loss from any deviation between the actual cost and the target cost of the work. A commonly proposed method for setting the level of the sharing fraction is shown herein to be inadequate because it is not. in general, Pareto-optimal. Though the goal of achieving Pareto-optimality is advocated, it is further shown that this goal may be in conflict with that of encouraging cost reduction by the contractor.Keywords
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