An Economic Analysis of the Truth in Negotiations Act (TINA)

Abstract

The Truth in Negotiations Act (TINA) requires contractors (often sole-source) to submit cost or pricing data that is current, complete, and accurate. 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. 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 the moral hazard problem, that is, contractors lack proper incentives to exert their best efforts to achieve cost efficiency. For example, in fixed-price contracts, where moral hazard is otherwise appropriately addressed, the use of TINA undesirably removes contractors incentives to exert effort. The policy implication of this report is that a lax use of TINA in the context of firm-fixed-price 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, a TINA waiver should be considered for the early period contracts so contractors can truthfully reveal their best-effort cost information.