Explaining Cost Overruns of Large-Scale Transportation Infrastructure Projects using a Signalling Game
AbstractStrategic behaviour is one of the main explanations for cost overruns. It can theoretically be supported by agency theory, in which strategic behaviour is the result of asymmetric information between the principal and agent. This paper gives a formal account of this relation by a signalling game. This is a game with incomplete information which considers the way in which parties anticipate upon other parties' behaviour in choosing a course of action. The game shows how cost overruns are the result of an inappropriate signal. This makes it impossible for the principal to distinguish between the types of agents, and hence, allows for strategic behaviour. It is illustrated how cost overruns can be avoided by means of two policy measures, e.g. an accountability structure and benchmarking.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1307.2180.
Date of creation: Jul 2013
Date of revision:
Publication status: Published in Transportmetrica A: Transport Science, vol. 9, no. 3, 2013, 239-258
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-15 (All new papers)
- NEP-CTA-2013-07-15 (Contract Theory & Applications)
- NEP-NPS-2013-07-15 (Nonprofit & Public Sector)
- NEP-PPM-2013-07-15 (Project, Program & Portfolio Management)
- NEP-TRE-2013-07-15 (Transport Economics)
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- I.P.L. P'ng, 1983. "Strategic Behavior in Suit, Settlement, and Trial," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 539-550, Autumn.
- Brunes, Fredrik & Lind, Hans, 2014. "Explaining cost overruns in infrastructural projects: A new framework with applications to Sweden," Working Paper Series 14/1, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), Royal Institute of Technology.
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