Auditing cost overrun claims
AbstractWe consider a cost-reimbursement or a cost-sharing procurement contract between the administration and a firm. The firm privately learns the true cost overrun once the project has started and it can manipulate this information. We characterize the optimal auditing policy of cost overrun claims as a function of the initial contractual payment, the share of the cost overrun paid by the administration, the cost and the accuracy of the auditing technology, and the penalty rate that can be imposed on fraudulent firms. We also show that this possibility of misreporting reduces the set of projects carried out and biases the choice of the quality level of those projects that the administration carries out.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 54 (2004)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/jebo
Other versions of this item:
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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