Procurement with Unenforceable Contract Time and the Law of Liquidated Damages
Time overruns are common in public works and are not confined to inherently complex tasks. One explanation advanced in this paper is that bidders can undergo unpredictable changes in production costs which generate an option value of waiting. By exploiting the real-option approach, we examine how the inability to force sellers to meet the contract time influences their bidding behaviour, and how this can ultimately affect the parties’ expected payoffs. Further, we examine the outcome of the bidding process when legal rules prevent the promisee from contracting for damage measures which would grant more than her lost expectation. We show that when the pre-agreed compensatory payments prove insufficient to discourage delayed orders, setting a liquidated damages clause would not lead to a Pareto superior outcome with respect to the no-damage-for delay condition. While such a clause would increase the seller’s expected payoff, the buyer’s expected payoff is lower than when the contract does not provide for any compensation for late-delivery.
|Date of creation:||Jun 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Corso Magenta, 63 - 20123 Milan|
Web page: http://www.feem.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Garvin & Charles Cheah, 2004. "Valuation techniques for infrastructure investment decisions," Construction Management and Economics, Taylor & Francis Journals, vol. 22(4), pages 373-383.
- Manelli, Alejandro M & Vincent, Daniel R, 1995.
"Optimal Procurement Mechanisms,"
Econometric Society, vol. 63(3), pages 591-620, May.
- Juan José Ganuza, 2003. "Competition and cost overruns in procurement," Economics Working Papers 772, Department of Economics and Business, Universitat Pompeu Fabra.
- Calzolari, Giacomo & Spagnolo, Giancarlo, 2009. "Relational Contracts and Competitive Screening," CEPR Discussion Papers 7434, C.E.P.R. Discussion Papers.
- Chiara D'Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2009.
"It is never too late: Optimal penalty for investment delay in public procurement contracts,"
0907, University of Brescia, Department of Economics.
- 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.
- Che, Y.K., 1991.
"Design Competition through Multidimensional Auctions,"
9123, Wisconsin Madison - Social Systems.
- Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
- Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2004.
"Bidding With Securities: Auctions and Security Design,"
NBER Working Papers
10891, National Bureau of Economic Research, Inc.
- 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.
- Andrzej Skrzypacz & Peter M. DeMarzo & Ilan Kremer, 2004. "Bidding with Securities: Auctions and Security Design," Econometric Society 2004 North American Winter Meetings 637, Econometric Society.
- Andrzej Skrzypacz & Peter M. DeMarzo & Ilan Kremer, 2004. "Bidding with Securities: Auctions and Security Design," Econometric Society 2004 North American Winter Meetings 641, Econometric Society.
- 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, 02.
- Nabil J Al-Najjar & Luca Anderlini & Leonardo Felli, 2002.
STICERD - Theoretical Economics Paper Series
431, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Al-Najjar, Nabil I. & Anderlini, Luca & Felli, Leonardo, 2002. "Unforeseen Contingencies," CEPR Discussion Papers 3271, C.E.P.R. Discussion Papers.
- Nabil Al-Najjar & Luca Anderlini & Leonardo Felli, 2002. "Unforeseen contingencies," LSE Research Online Documents on Economics 3578, London School of Economics and Political Science, LSE Library.
- 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.
- McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2012.45. 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: (barbara racah)
If references are entirely missing, you can add them using this form.