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"It Is Never too late": Optimal Penalty for Investment Delay in Public Procurement Contracts

  • Sergio Vergalli

    (University of Brescia and FEEM)

  • Chiara D’Alpaos

    (DIMEG, Univ. of Padova)

  • Michele Moretto

    (Univ. of Padova and FEEM)

  • Paola Valbonesi

    (Univ. of Padova)

We provide a general framework in which to determine the optimal penalty fee inducing the contractor to respect the contracted delivery date in public procurement contracts (PPCs). We do this by developing a real option model that enables us to investigate the contractor’s value of investment timing flexibility which the penalty rule - de facto - introduces. We then apply this setting in order to evaluate the range of penalty fees in the Italian legislation on PPCs. According to our calibration analysis, there is no evidence that the substantial delays recorded in the execution times of Italian PPCs are due to incorrectly set penalty fees. This result opens the way for other explanations of delays in Italian PPCs: specifically, we extend our model to investigate the probability of enforcing a penalty which we assume negatively affected by the "quality" of the judicial system and the discretionality of the court in voiding the rule. Our simulations show that the penalty fee is highly sensitive to the "quality" of the judicial system. Specifically referring to the Italian case, we show that the optimal penalty should be higher than those set according to the present Italian law.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.78.

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Date of creation: Sep 2009
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Handle: RePEc:fem:femwpa:2009.78
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  1. Dalen, Dag Morten & Moen, Espen R. & Riis, Christian, 2006. "Contract renewal and incentives in public procurement," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 269-285, March.
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  4. Patrick Bajari & Gregory Lewis, 2009. "Procurement Contracting with Time Incentives: Theory and Evidence," NBER Working Papers 14855, National Bureau of Economic Research, Inc.
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  16. Michele Moretto & Paola Valbonesi, 2007. "Firm Regulation and Profit-Sharing: A Real Option Approach," "Marco Fanno" Working Papers 0052, Dipartimento di Scienze Economiche "Marco Fanno".
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