Auctioning incentive contracts: the common cost, independent types case

Laffont and Tirole (1987) analyzed the problem of a regulator that wants to select one of n firms to carry out a single indivisible project when the firms have private and independent costs and have the possibility of an ex-post investment in (non-observable) effort to reduce the (observable) cost. This paper generalizes the analysis to a model of common costs, unknown at the bidding stage, while keeping the assumption of independent types. I show that the main characteristics of the private costs model are kept in a common cost framework. I provide two mechanisms that may be used to implement the optimal contract.