Cost-plus-fixed-fee contracts with payment ceilings: Impact on commercial markets and indirect cost recoveries Article

Loeb, MP, Surysekar, K. (1997). Cost-plus-fixed-fee contracts with payment ceilings: Impact on commercial markets and indirect cost recoveries . 16(3), 245-269. 10.1016/S0278-4254(97)00001-X



cited authors

  • Loeb, MP; Surysekar, K

abstract

  • We consider a monopolist selling one product to a commercial market and a related, but distinct, product to the government. In the absence of sales to the government, the usual welfare loss associated with too little quantity being sold at too high a price arises. Using an agency model, the welfare consequences of using a cost-plus contract for procurement are examined. We show that such a contract exacerbates the welfare loss in the commercial market due to cost shifting motivated by cost allocation. We then turn attention to the use of a payment ceiling in connection with a cost-plus contract. Here we show that the payment ceiling reduces the welfare loss in the commercial market by motivating the monopolist both to increase commercial output and to lower the price. Additionally, the use of a payment ceiling is seen to reduce the moral hazard problem associated with cost-plus contracts. © 1997 Elsevier Science Inc.

publication date

  • January 1, 1997

Digital Object Identifier (DOI)

start page

  • 245

end page

  • 269

volume

  • 16

issue

  • 3