Whatever happened to competition in space agency procurement? The case of NASA

Journal of Applied Economics

tendering and raise adverse selection problems (the contractor that underestimates
the technical risk wins the tender, forcing the agency to renegotiate later). This
results in fixed-price contracts being unsuitable for high-risk programs. Cost-plus
contracts are thus often preferred in the presence of high risk, but raise moral
hazard problems (the contractor has no incentive to minimise costs). In sum, fixed-
price contracts and the presence of competition are factors that control costs, but
less so rent transfers. This traditional dilemma of cost vs. rent minimization in
contracting is augmented by the presence of commercial space markets to take
into account the fact that minimum rent could harm the competitive position of the
national industry in competitive markets. The same adverse effect could be
experienced by the presence of minimum cost in government programs, which
could result in highly specialized projects with less widespread development of
dual-use projects and less generic research.¹

Other factors that complicate the procurement process are the level of risk of
the space program, the presence of asymmetry of information between the principal
and the agent and long-term implications (re-negotiation, follow-up and lock-in
effects). This makes the analysis of procurement behavior complicated, especially
when looking at time-series where procurement paradigms change, organizational
re-structuring occurs and new markets develop. Two factors and a policy response
affected NASA procurement behavior in the early 1990s: the diminishing
government budgets (increasing commercial markets) following the end of the
Cold War, the consolidation of the space industry and the change of NASA
procurement philosophy with the introduction of Faster-Better-Cheaper (FBC).

FBC was mainly applied to NASA developmental programs and justified on
the grounds of diminishing budgets and was designed to drive down costs of
space programs (see Norwood 1997, who also discusses the expected benefits of
this policy on commercial markets, and also Hoben 1997 for a discussion of
precursors to this approach from the 1970s). Despite successes in cutting costs
and size of exploration programs, there were a number of failures of high-profile
programs that caused criticism in terms of unacceptable high-risk-driven cost
savings, as well as major delays (Wheeler 2006).

Such policy changes can potentially impact the level of competition in
contracting, types of contracts, and ultimately affect the rent and cost of space

¹ On the other hand, given the future development of commercial space programs (X-price
foundation program for suborbital launch vehicles, see Coren 2004), public requirements of
space agencies could largely be met by commercial projects resulting in budgetary savings.

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