An economic analysis of the truth in negotiations act

Abstract

It has been more than 50 years since TINA was first enacted in 1962. In a nutshell, TINA requires contractors (often sole-source) to submit “cost or pricing data” when they negotiate the price of a contract with the federal government. The contractors must certify that the information they provide is “current, complete, and accurate.” Failing to disclose truthful information could lead to civil or criminal investigation. The intention of TINA is to protect the government and taxpayers from being ripped off by better informed contractors. We argue that the current TINA practice, despite its good intention, is subject to many unintended negative consequences that arise from contractors’ bad incentives. Such bad incentives are inherently associated with the current TINA framework. We employ an incentive-centric approach to perform an economic analysis of TINA. Our analysis indicates that the main flaw of TINA is its failure to address moral hazard problem, that is, contractors lack proper incentives to exert their best efforts to achieve cost efficiency. In some cases, such as cost-plus contracts, where moral hazard is an inherent concern to begin with, TINA fails to provide remedies. More detrimentally, in other cases such as fixed-price contracts, where moral hazard is otherwise appropriately addressed, use of TINA undesirably removes contactors’ incentives to exert effort. Therefore, TINA, in the context of fixed-price contracts, is the problem rather than solution. The policy implication of this report is that a lax use of TINA in the context of FFP contracts should be preferred to a strict use. Moreover, in a repeated game situation where a continuous long-term demand for the product from the DoD is expected, TINA waiver should be considered for the early period contracts so contractors can truthfully reveal their best-effort cost information.