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Reputation and Contractual Performance in Long-Term Projects

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  • Tracy R. Lewis

Abstract

The systematic cost overruns occurring in large-scale, long-term projects are rationalized as the outcome of the bilateral relationship between the sponsor and contractor in which neither party can credibly commit himself to a course of action over time. We model this long-term relationship as a sequential game in which funding for the project is based on the performance of the contractor to date. Contractors will typically work hard initially to keep costs down to increase the chances that the project will be continued. The sponsor is aware of this behavior when processing information on costs to determine whether to continue the project. We analyze the equilibrium of this process and investigate its temporal properties.

Suggested Citation

  • Tracy R. Lewis, 1986. "Reputation and Contractual Performance in Long-Term Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 141-157, Summer.
    • Handle: RePEc:rje:randje:v:17:y:1986:i:summer:p:141-157
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    Cited by:

    1. Korok Ray, 2007. "Performance Evaluations and Efficient Sorting," Journal of Accounting Research, Wiley Blackwell, vol. 45(4), pages 839-882, September.
    2. Perez-Castrillo, David & Riedinger, Nicolas, 2004. "Auditing cost overrun claims," Journal of Economic Behavior & Organization, Elsevier, vol. 54(2), pages 267-285, June.
    3. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    4. Mahmoudi, Amin & Javed, Saad Ahmed, 2022. "Performance Evaluation of Construction Sub‐contractors using Ordinal Priority Approach," Evaluation and Program Planning, Elsevier, vol. 91(C).
    5. Elisabetta Iossa & Patrick Rey, 2014. "Building Reputation For Contract Renewal: Implications For Performance Dynamics And Contract Duration," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 549-574, June.
    6. Tamada, Yasunari & Tsai, Tsung-Sheng, 2007. "Optimal organization in a sequential investment problem with the principal's cancellation option," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 631-641, June.
    7. Juan‐José Ganuza, 2007. "Competition And Cost Overruns In Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 55(4), pages 633-660, December.
    8. Kim, In-Gyu, 1998. "A model of selective tendering: Does bidding competition deter opportunism by contractors?," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(4), pages 907-925.
    9. Yildirim, Huseyin, 2004. "Piecewise procurement of a large-scale project," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1349-1375, November.
    10. Mingfeng Lin & Siva Viswanathan & Ritu Agarwal, 2010. "An Empirical Study of Online Software Outsourcing: Signals under Different Contract Regimes," Working Papers 10-22, NET Institute.
    11. Juan J. Ganuza, 1998. "Competition and cost overruns. Optimal misspecification of procurement contracts," Economics Working Papers 471, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2002.

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