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 InfoPaper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 1999-12.
Length: 30 pages
Date of creation: Sep 1999
Date of revision:
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More information through EDIRC
cost overruns; auditing; procurement;
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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