This paper first studies how cost padding, auditing and collusion with auditors affect the power of incentive schemes in procurement and regulation. Unaudited cost padding requires fixed price contracts. Incentive schemes are more powerful under imperfect auditing than under perfect auditing and...

We develop progressively models enabling us to characterize optimal contracts between government and firms when uncertainty and various types of asymmetric information (moral hazard and adverse selection) are present. We obtain normative contracts which are close to commonly used contracts with...