IDEAS home Printed from https://ideas.repec.org/a/oup/jleorg/v31y2015i1p160-186..html
   My bibliography  Save this article

Procurement with Unenforceable Contract Time and the Law of Liquidated Damages

Author

Listed:
  • Cesare Dosi
  • Michele Moretto

Abstract

Time overruns are common in public projects and are not confined to inherently complex tasks. One explanation is that sellers can undergo changes in production costs which generate a value of waiting. Using the real-option approach, we examine the effects of the lack of incentives for on-time delivery on competitive bids for a fixed-price procurement contract. Next, we analyze the effects of liquidated damages aimed at protecting the buyer for the expected losses due to project delays. We show that when the expectation damage measure fails to discourage time overruns, a liquidated damages stipulation does not lead to a Pareto superior outcome. Although liquidated damages tend to make the seller better off, the buyer’s expected payoff is lower than when the contract does not provide for any damages for breach. (JEL C61, D44, D86, K12)

Suggested Citation

  • Cesare Dosi & Michele Moretto, 2015. "Procurement with Unenforceable Contract Time and the Law of Liquidated Damages," Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(1), pages 160-186.
  • Handle: RePEc:oup:jleorg:v:31:y:2015:i:1:p:160-186.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/jleo/ewt020
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Juan José Ganuza, 2003. "Competition and cost overruns in procurement," Economics Working Papers 772, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
    3. Al-Najjar, Nabil I. & Anderlini, Luca & Felli, Leonardo, 2002. "Unforeseen Contingencies," CEPR Discussion Papers 3271, C.E.P.R. Discussion Papers.
    4. Calzolari, Giacomo & Spagnolo, Giancarlo, 2009. "Relational Contracts and Competitive Screening," CEPR Discussion Papers 7434, C.E.P.R. Discussion Papers.
    5. Sergio Vergalli & Chiara D’Alpaos & Michele Moretto & Paola Valbonesi, 2009. ""It Is Never too late": Optimal Penalty for Investment Delay in Public Procurement Contracts," Working Papers 2009.78, Fondazione Eni Enrico Mattei.
    6. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    7. Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2005. "Bidding with Securities: Auctions and Security Design," American Economic Review, American Economic Association, vol. 95(4), pages 936-959, September.
    8. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, vol. 63(3), pages 591-620, May.
    9. Michael Garvin & Charles Cheah, 2004. "Valuation techniques for infrastructure investment decisions," Construction Management and Economics, Taylor & Francis Journals, vol. 22(4), pages 373-383.
    10. Cesare Dosi & Michele Moretto, 2013. "Auctioning Monopoly Franchises: Award Criteria and Rollout Obligations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(1), pages 53-75, February.
    11. Ram Singh, 2009. "Delays and Cost Overruns in Infrastructure Projects -- An Enquiry into Extents, Causes and Remedies," Working papers 181, Centre for Development Economics, Delhi School of Economics.
    12. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
    13. Samuel A. Rea, Jr., 1984. "Efficiency Implications of Penalties and Liquidated Damages," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 147-168, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cesare Dosi & Michele Moretto, 2017. "Cost Uncertainty and Time Overruns in Public Procurement: a Scoring Auction for a Contract with Delay Penalties," Working Papers 2017.02, Fondazione Eni Enrico Mattei.
    2. repec:eee:ejores:v:267:y:2018:i:1:p:368-380 is not listed on IDEAS
    3. Chiara D’Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2013. "Time overruns as opportunistic behavior in public procurement," Journal of Economics, Springer, vol. 110(1), pages 25-43, September.

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:jleorg:v:31:y:2015:i:1:p:160-186.. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: https://academic.oup.com/jleo .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.