COMPETITION AND COST OVERRUNS IN PROCUREMENT -super-*
AbstractMost cases of cost overruns in public procurement are related to important changes in the initial project design. This paper provides a rationale for the observed pattern in public procurement of underinvestment in design specification. We propose a two-stage model in which the sponsor first decides how much to invest in design specification and auctions the project to horizontally differentiated contractors. After the contract has been awarded and implemented, the sponsor and contractor receive new information about the optimal project design and renegotiate the contract to accommodate changes in the initial project's design. We show that the sponsor's optimal strategy is to underinvest in design specification, which makes significant cost overruns likely. Since no such underinvestment occurs when contractors are not horizontally differentiated, cost overruns are seen to arise as a consequence of lack of competition in the procurement market. Copyright 2007 Blackwell Publishing Ltd..
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal The Journal of Industrial Economics.
Volume (Year): 55 (2007)
Issue (Month): 4 (December)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-1821
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- Elisabetta Iossa & David Martimort, 2008.
"The Simple Micro-Economics of Public-Private Partnerships,"
The Centre for Market and Public Organisation
08/199, Department of Economics, University of Bristol, UK.
- Elisabetta Iossa & David Martimort, 2008. "The Simple Micro-Economics of Public-Private Partnerships," CEIS Research Paper 139, Tor Vergata University, CEIS, revised 15 Feb 2013.
- Bucciol, Alessandro & Chillemi, Ottorino & Palazzi, Giacomo, 2013. "Cost overrun and auction format in small size public works," European Journal of Political Economy, Elsevier, vol. 30(C), pages 35-42.
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