Essays on Contractual Completeness in Defense Acquisition

Abstract

The procurement of major weapons systems by the US Department of Defense (DoD) involves a challenging contracting environment in which standard pricing mechanisms, contract design, and solutions to incentive problems often do not adequately accommodate all of its unique characteristics. As a result, economists have frequently aspired to model these idiosyncratic features to address concerns of efficiency and strategic manipulation, among others. My intent with this collection of essays is to continue this endeavor. Specifically, I will apply economic analysis to the US defense acquisition process in order to enhance current understanding of the defense procurement environment, the tools available to DoD officials in addressing unique procurement issues, and the potential usefulness of these tools in other procurement scenarios. My analysis includes the investigation of multiple policies and institutions within the DoD contracting environment and focuses primarily on the DoD's employment of an incomplete contracting approach.

The next chapter examines the determinants of contractual completeness in major weapons procurement. The focus of this chapter is the DoD acquisition official's selection of a contract type, given project and firm characteristics. Additionally, the empirical research in this chapter aids in describing the role of repeat interactions in the defense contracting environment. The third chapter addresses the relevance of describability in determining cost outcomes for DoD weapons contracts. Indescribable physical characteristics and unachieved states of nature are at the heart of the hold up problem, yet economists debate the optimality of an incomplete contract as a possible solution. Using contract selection guidelines from the Federal Acquisition Regulation and performance indicators from the DoD's Earned Value Management process, I analyze the impact of ex ante physical describability of the underlying project on subsequent cost and schedule performance of its associated contract. My intent with this chapter is to offer new empirical information pertinent to the debate regarding the relevance of describability. Finally, the fourth chapter provides a theoretical model of contract design in the presence of exogenous uncertainty regarding the common procurement cost of an item. This chapter capitalizes on similarities between DoD acquisition and post-disaster highway procurement to demonstrate the possible gains of extending some of the DoD's contract design tools to additional government agencies.