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Competition and cost overruns in procurement

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Abstract

Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper deals with the problem of design speciffication in public procurement and provides a rationale for design misspeciffication. We propose a model in which the sponsor decides how much to invest in design speciffication and awards competitively the project to a contractor. After the project has been awarded the sponsor engages in bilateral renegotiation with the contractor, in order to accommodate changes in the initial project's design that new information makes desirable. When procurement takes place in the presence of horizontally differentiated contractors, the design's speciffication level is seen to affect the resulting degree of competition. The paper highlights this interaction between market competition and design speciffication and shows that the sponsor's optimal strategy, when facing an imperfectly competitive market supply, is to underinvest in design speciffication so as to make signifficant cost overruns likely. Since no such misspeciffication occurs in a perfectly competitive market, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 772.

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Date of creation: Oct 2003
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Handle: RePEc:upf:upfgen:772

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Cost overruns; procurement contracts; strategic ignorance;

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Cited by:
  1. Dewatripont, Mathias & Legros, Patrick, 2005. "Public-private partnerships: contract design and risk transfer," EIB Papers 5/2005, European Investment Bank, Economics Department.
  2. repec:hal:wpaper:hal-00512813 is not listed on IDEAS
  3. Federico Weinschelbaum & Leandro Arozamena, 2005. "The Effect of Corruption on Bidding Behavior in First-Price Auctions," Working Papers 82, Universidad de San Andres, Departamento de Economia, revised Aug 2005.
  4. Decio Coviello & Mario Mariniello, 2008. "Does Publicity Affect Competition? Evidence from Discontinuities in Public Procurement Auctions?," Economics Working Papers ECO2008/04, European University Institute.
  5. Cesare Dosi & Michele Moretto, 2012. "Procurement with Unenforceable Contract Time and the Law of Liquidated Damages," Working Papers 2012.45, Fondazione Eni Enrico Mattei.
  6. Kenju Akai & Shigehiro Serizawa, 2009. "Auctions for Public Construction with Corner-cutting," ISER Discussion Paper 0740r, Institute of Social and Economic Research, Osaka University, revised Jul 2010.
  7. Calogero Guccio & Giacomo Pignataro & Ilde Rizzo, 2014. "Evaluating the efficiency of public procurement contracts for cultural heritage conservation works in Italy," Journal of Cultural Economics, Springer, vol. 38(1), pages 43-70, February.
  8. Eshien Chong & Carine Staropoli & Anne Yvrande-Billon, 2014. "Auction versus Negotiation in Public Procurement: Looking for Empirical Evidence," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00512813, HAL.
  9. Todd Kaplan, 2012. "Communication of preferences in contests for contracts," Economic Theory, Springer, vol. 51(2), pages 487-503, October.

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