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Explaining Cost Overruns of Large-Scale Transportation Infrastructure Projects using a Signalling Game

Listed author(s):
  • Chantal C. Cantarelli
  • Caspar G. Chorus
  • Scott W. Cunningham

Strategic behaviour is one of the main explanations for cost overruns. It can theoretically be supported by agency theory, in which strategic behaviour is the result of asymmetric information between the principal and agent. This paper gives a formal account of this relation by a signalling game. This is a game with incomplete information which considers the way in which parties anticipate upon other parties' behaviour in choosing a course of action. The game shows how cost overruns are the result of an inappropriate signal. This makes it impossible for the principal to distinguish between the types of agents, and hence, allows for strategic behaviour. It is illustrated how cost overruns can be avoided by means of two policy measures, e.g. an accountability structure and benchmarking.

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Paper provided by in its series Papers with number 1307.2180.

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Date of creation: Jul 2013
Publication status: Published in Transportmetrica A: Transport Science, vol. 9, no. 3, 2013, 239-258
Handle: RePEc:arx:papers:1307.2180
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  1. I.P.L. P'ng, 1983. "Strategic Behavior in Suit, Settlement, and Trial," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 539-550, Autumn.
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