Time is Money: Optimal Investment Delay in Procurement (and Concession) Contracts
AbstractProcurement (and concession) contracts are agreements granting the right to construct public works, operate and provide a service/good. The main advantage of a procurement contract is that it passes full responsibility for investment and operations to the private sector and consequently provides incentives for efficiency. Although most contracts include penalty/premium clauses to avoid construction risks (i.e. delays), evidence from ongoing procurement contracts shows that there are many delays in making investments. Actually these clauses introduce the flexibility to decide when it is optimal to invest and consequently increase the contract’s value for the contractor. Therefore if the contracting authority underestimates penalty/premium fees, these may be totally ineffective in avoiding construction risks. In this paper we specifically investigate the effects that penalty/premium clauses have on both contract value and reduction of delay. We also focus on the design of optimal penalty/premium rules.
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Bibliographic InfoPaper provided by University of Minnesota, Center for International Food and Agricultural Policy in its series Conference Papers with number 6642.
Date of creation: Aug 2006
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More information through EDIRC
procurement/concession contracts; premium/penalty fee; investment timing flexibility; Public Economics; L33; H57; D81;
Find related papers by JEL classification:
- L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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