An Economic Analysis of the Truth in Negotiations Acts

Abstract

TINA was first enacted in 1962 and 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. This research posits that the current TINA practice, despite its good intention, is subject to many unintended negative consequences that arise from contractors bad incentives. It employs an incentive-centric approach to perform an economic analysis of TINA and concludes 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. In some cases, such as cost-plus contracts, 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. The policy implication 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, a TINA waiver should be considered for the early period contracts so contractors can truthfully reveal their best-effort cost information.