Cost Revelation Mechanism Of Equipment Acquisition

Weapon programs are criticized for cost overruns. Information revelation as a new perspective for this issue is proposed. The distortion of the cost information concludes two parts: distortion resulted by low powered incentives and distortion resulted by cost padding. Details of the cost distortion phenomenon are described based on interviews with related scholars. Further, the reasons are divided into different kinds according to incentives and restrictions. Possible factors that would induce distortion of cost information in every phase of the lifecycle period are listed. Discussions are put forward from equipment market, procurement contracts, arm firms and cost auditing. There are four factors no pressures for quitting, collusions in the biding phase, the strategically buy-in, the capture of arms industry regulation in the limited competition market which lead distortion of cost information. The cost-plus contracts give firms incentives of cost padding and low powered effort for reducing the cost. The audit of cost can not be put into effect because of the rent-seeking and the behavior of maximizing budget. The time and phase of monitor and control for cost information can not meet the cost rule of life cycle period. The imperfection of audit system induces the buyer part not to check out the cost padding. The asymmetry of revenue induces the asymmetry of incentive for cost bargaining.Further, a mathematical structure that models institutions through which equipment acquisition activity is guided and coordinated is presented based on the theory of designing economic mechanisms. We use this cost revelation model to discuss what institutions should be created in order to achieve desired goals the revelation of the real cost. The method involves the construction of the relation between the cost type of arm firms and the type of the contracts. The model suggests the general idea that the acquisition side should structure bargaining by providing a series of linear contracts menu so that firms claiming to be lower cost select themselves into contracts where they bear a higher share of risk. According to the contract menu result of the revelation model and the reasons talked former, all-period control based on target-cost, monitoring of arm firms, advance for competition of arms market are put forward as the equipment cost revelation mechanism.