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

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  • Chantal C. Cantarelli
  • Caspar G. Chorus
  • Scott W. Cunningham

Abstract

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.

Suggested Citation

  • Chantal C. Cantarelli & Caspar G. Chorus & Scott W. Cunningham, 2013. "Explaining Cost Overruns of Large-Scale Transportation Infrastructure Projects using a Signalling Game," Papers 1307.2180, arXiv.org.
  • Handle: RePEc:arx:papers:1307.2180
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    File URL: http://arxiv.org/pdf/1307.2180
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    References listed on IDEAS

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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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    Cited by:

    1. Brunes, Fredrik & Lind, Hans, 2014. "Explaining cost overruns in infrastructural projects: A new framework with applications to Sweden," Working Paper Series 14/1, Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin).

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