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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- 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.
- 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.
- 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.
- 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.
- Jean Tirole & Jean-Jaques Laffont, 1985.
"Using Cost Observation to Regulate Firms,"
368, Massachusetts Institute of Technology (MIT), Department of Economics.
- Kuhn, Michael & Siciliani, Luigi, 2013. "Manipulation and auditing of public sector contracts," European Journal of Political Economy, Elsevier, vol. 32(C), pages 251-267.
- 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.
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