Technological matching and economic value of performance specification in public procurement

In this paper, a theoretical model is developed to analyze the effect of the performance specification scheme in a public procurement problem on the contractors' incentives for technological development and for moral hazard. Considering the variety of technical needs in construction projects, we have pointed out that the performance specification fosters the matching the technical needs of each work with a contractor endowed with the relevant professional expertise who can deal with those needs most efficiently. We have proven that such a matching mechanism motivates contractors to develop new technologies. Moreover, we have pointed out that the role of performance tests in alleviating the contractors' moral hazard for excess cost saving by adopting unreliable new technology.