Patrick W. Schmitz
Economics Letters, Vol. 121 (3), 2013, 533-536.
Abstract. The government wants two tasks to be performed. In each task, unobservable effort can be exerted by a wealth-constrained private contractor. If the government faces no binding budget constraints, it is optimal to bundle the tasks. The contractor in charge of both tasks then gets a bonus payment if and only if both tasks are successful. Yet, if the government has only a limited budget, it may be optimal to separate the tasks, so that there are two contractors each in charge of one task. In this case, high efforts in both tasks can be implemented with smaller bonus payments.
The working paper version is available for download (CEPR Discussion Paper 9676).
The paper is available for download.