Problem
Consider the following proposal for reducing cost overruns. Two contractors would be given a contract to produce a tank of a given specification. Producer A would be reimbursed for the actual costs incurred by producer B, and vice versa. Explain why this system might induce each firm to produce efficiently. If the two firms were essentially identical, what risk premium would they require in bidding on the contract? Under what conditions might the risk premium be large? What are other possible pitfalls in this system?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.