Contracting for Infrastructure Projects as Credence Goods
AbstractLarge infrastructure projects are a major responsibility of government, who usually lacks expertise to fully specify the demanded projects. Contractors, typically experts on such projects, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model the contracting for such infrastructure projects taking into account this credence goods feature and examine the performance of commonly used contracting methods. We show that when building costs are public information, multistage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. While the latter leads to minimum design effort, sequential search suffers from a commitment problem. If building costs are the private information of the contractors and are revealed to them after design cost is sunk, competitive bidding may involve sampling more than two contractors. The commitment problem under sequential search may be overcome by the procurer's incentive to search for low building cost if the design cost is sufficiently low. If this is the case, sequential search may outperform competitive bidding.
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Bibliographic InfoPaper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 73.
Length: 21 pages
Date of creation: 05 Oct 2011
Date of revision:
Credence Goods; Design-Build; Competitive Bidding; Sequential Search; Infrastructure Projects;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-CTA-2011-10-15 (Contract Theory & Applications)
- NEP-PPM-2011-10-15 (Project, Program & Portfolio Management)
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.:
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