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A Regulatory Interpretation of DoD Profit Policy

"A Regulatory Interpretation of DoD Profit Policy," The Review of Economics and Statistics, Vol. 74 (1992), 394-403 (with M.S. Goldberg and T.P. Frazier). The market in which the Department of Defense (DoD) procures military equipment is not fully competitive. Apart from foreign military sales, DoD is the sole purchaser of major items of military equipment. Moreover, the number of potential manufacturers of these items is often quite small as well. The DoD applies a set of rules, known as the weighted guidelines, in determining the markups paid to manufacturers. The weighted guidelines are promulgated in the Federal Acquisition Regulations (FAR). In particular, the FAR allows for two components of markup above cost. One component is proportional to total allowable costs on the contract, and the other component is proportional to the net book value of the capital employed in production.
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