Socially Optimal Procurement with Tight Budgets and Rationing Signe Anthon, Peter Bogetoft and Bo Jellesmark Thorsen Royal Veterinary and Agricultural University, Copenhagen April 11, 2006 Abstract We investigate the behaviour of a Social Planner that secures the sup- ply of a public good through contracting with private agents. The So- cial Planner maximizes social net benets under asymmetric information about production costs, while controlled with a xed budget and. We nd that the tight budget changes the optimal contract design in several ways: the social planner minimizes costs, rations high-cost contracts to reduce xed costs and information rents and distorts contracts for all agent types, including low-cost agents. Also that even though social costs are taken into consideration, they do not a/ect the optimal contracts, when budgets are tight - in that case the budget constraint dominates the solution. Keywords: Principle-Agent, tax distortion, social cost, budget con- straint, rationing JEL: D45, D82, Q5, Q58 1