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Renegotiation on incomplete procurement contracts

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  • Hojin Jung

Abstract

This article examines the impact of incomplete contracts on procurement costs in road construction auctions. Ex ante contracts in these auctions often fail to specify all of the potential construction contingencies, and consequently, changes in scope are necessary after construction begins. Using Vermont road construction contract data, this study finds evidence that there is a statistically significant difference in costs of firms between auctions with and without extra work adjustments. Substantial adaptation costs are responsible for the higher procurement outlays in incomplete contract. I also find that bidders inflate their bids to incorporate risk premiums in incomplete contracts; however, my estimates suggest that this bidding behaviour does not affect their profit margins.

Suggested Citation

  • Hojin Jung, 2016. "Renegotiation on incomplete procurement contracts," Applied Economics, Taylor & Francis Journals, vol. 48(23), pages 2125-2138, May.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:23:p:2125-2138
    DOI: 10.1080/00036846.2015.1114579
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    References listed on IDEAS

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    Cited by:

    1. Kris De Jaegher & Michal Soltes & Vitezslav Titl, 2023. "Easing Renegotiation Rules in Public Procurement: Evidence from a Policy Reform," CERGE-EI Working Papers wp757, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Abeysekara, Baudhi & Perera, Piyaruwan & Chhipi Shrestha, Gyan Kumar & Gunaruwan, Lalithasiri & Kumarage, Amal & Sadiq, Rehan & Hewage, Kasun, 2021. "Improving the capital deployment efficiency: An infrastructure investment planning process in transportation project," Research in Transportation Economics, Elsevier, vol. 88(C).
    3. He Huang & Zhipeng Li & De Liu & Hongyan Xu, 2022. "Auctioning IT Contracts with Renegotiable Scope," Management Science, INFORMS, vol. 68(8), pages 6003-6023, August.

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