Optimal procurement contracts under a binding budget constraint

The traditional literature on agency models predicts that, for zero liability contracts, it is optimal for the principal to pay for the information he cannot observe. However, this principle is not valid for a set of contracts mostly used by government agencies whose distinguishing feature is represented by a stringent budget constraint for the principal. This paper shows that in this environment the principal will either choose a structure exibiting pooling or a bargaining solution. The bargaining solution represents the analytical proof to the intuition of the difficulty in implementing procurement contracts stated by Laffont and Tirole (1993).     

Does the flypaper model stick? A test of the relative performance of the flypaper and conventional models of local government budgetary behaviour

Two of the most widely referred to models of local (or state) budgetary behaviour are developed and tested. The models considered are a variant of the flypaper model (see, for example, Courant et al., 1979 and Oates, 1979) and a conventional model which builds on the seminal work of Wilde (1969, 1971). The models are developed in a manner which allows them to be tested empirically using data for English local governments. Two types of test are employed: the ability of the two models to explain the variations in expenditure levels across local governments within any given fiscal year; the ability of the models to predict future levels of expenditure given changes to local government budget constraints (as brought about, for example, by changs in grants-in-aid from central government).