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Auditing Cost Overrun Claims

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Author Info
David Pérez-Castrillo (Universitat Autònoma de Barcelona)
Nicolas Riedinger (ENSAE, Paris)

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Abstract

We 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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File URL: http://www.econ.ku.dk/CIE/Discussion%20Papers/1999/Pdf%20files/9912.pdf
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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 1999-12.

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Length: 30 pages
Date of creation: Sep 1999
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Handle: RePEc:kud:kuieci:1999-12

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Related research
Keywords: cost overruns; auditing; procurement;

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Find related papers by JEL classification:
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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March. [Downloadable!] (restricted)
    Other versions:
  2. J. Michael Cummins, 1977. "Incentive Contracting for National Defense: A Problem of Optimal Risk Sharing," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 168-185, Spring. [Downloadable!] (restricted)
  3. Macho-Stadler, Ines & Perez-Castrillo, J David, 1997. "Optimal Auditing with Heterogeneous Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 951-68, November.
  4. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn. [Downloadable!] (restricted)
  7. Arvan, Lanny & Leite, Antonio P. N., 1990. "Cost overruns in long term projects," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 443-467, September. [Downloadable!] (restricted)
  8. David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gavin C. Reid, 2002. "Investor Conduct Towards New High Technology Firms: UK Evidence on How Risk is Managed," CRIEFF Discussion Papers 0206, Centre for Research into Industry, Enterprise, Finance and the Firm. [Downloadable!]
  2. Inés Macho Stadler & David Perez-Castrillo, 2005. "Optimal inspection policy and income-tax compliance," Hacienda Pública Española, IEF, vol. 173(2), pages 9-45, June. [Downloadable!]
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