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Time Overruns as Opportunistic Behavior in Public Procurement

Author

Listed:
  • Chiara D’Alpaos

    (University of Padua, Department of Civil, Architectural and Environmental Engineering)

  • Michele Moretto

    (University of Padua, Department of Economics, Fondazione Eni Enrico Mattei and Centro Studi Levi-Cases)

  • Paola Valbonesi

    (University of Padua, Department of Economics and Management)

  • Sergio Vergalli

    (University of Brescia, Department of Economics and Fondazione Eni Enrico Mattei)

Abstract

This paper considers the supplier’s strategic delivery lead time in a public procurement setting as the result of the firm’s opportunistic behaviour on the optimal investment timing. In the presence of uncertainty on construction costs, we model the supplier’s option to defer the contract’s execution as a Put Option. We include in the model both the discretion of the court of law in enforcing contractual clauses (i.e. a penalty for delays) and the "quality" of the judicial system. Then, we calibrate the model using parameters that mimic the Italian procurement for public works and calculate the maximum amount that a firm is "willing to pay" (per day) to postpone the delivery date and infringe the contract provisions. Our results show that the incentive to delay is greater the higher the construction costs and their volatility, and the weaker the penalty enforcement by the courts of law.

Suggested Citation

  • Chiara D’Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2012. "Time Overruns as Opportunistic Behavior in Public Procurement," Working Papers 2012.78, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2012.78
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    References listed on IDEAS

    as
    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    2. Andrew Postlewaite, 2007. "Courts of Law and Unforeseen Contingencies," Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 662-684, October.
    3. Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1173-1211.
    4. 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.
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    6. Decio Coviello & Luigi Moretti & Giancarlo Spagnolo & Paola Valbonesi, 2018. "Court Efficiency and Procurement Performance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(3), pages 826-858, July.
    7. 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.
    8. Francesco Decarolis, 2014. "Awarding Price, Contract Performance, and Bids Screening: Evidence from Procurement Auctions," American Economic Journal: Applied Economics, American Economic Association, vol. 6(1), pages 108-132, January.
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    16. Bucciol, Alessandro & Chillemi, Ottorino & Palazzi, Giacomo, 2013. "Cost overrun and auction format in small size public works," European Journal of Political Economy, Elsevier, vol. 30(C), pages 35-42.
    17. Guccio, Calogero & Pignataro, Giacomo & Rizzo, Ilde, 2009. "The performance of local government in the execution of public works," MPRA Paper 16094, University Library of Munich, Germany.
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    Citations

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    Cited by:

    1. Bertolini, Marina & D’Alpaos, Chiara & Moretto, Michele, 2016. "Investing in Photovoltaics: Timing, Plant Sizing and Smart Grids Flexibility," MITP: Mitigation, Innovation and Transformation Pathways 244540, Fondazione Eni Enrico Mattei (FEEM).
    2. Decarolis, Francesco & Palumbo, Giuliana, 2015. "Renegotiation of public contracts: An empirical analysis," Economics Letters, Elsevier, vol. 132(C), pages 77-81.
    3. Valentina Antoniucci & Giuliano Marella, 2014. "Torri incompiute: i costi di produzione della rigenerazione urbana in contesti ad alta densità," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2014(3), pages 117-124.
    4. Decio Coviello & Luigi Moretti & Giancarlo Spagnolo & Paola Valbonesi, 2018. "Court Efficiency and Procurement Performance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(3), pages 826-858, July.
    5. Giacomo Corneo & Sergio Vergalli, 2013. "Editorial: The economics of irreversible choices," Journal of Economics, Springer, vol. 110(1), pages 1-3, September.
    6. repec:eee:energy:v:149:y:2018:i:c:p:890-902 is not listed on IDEAS
    7. Bergantiños, Gustavo & Lorenzo, Leticia, 2019. "How to apply penalties to avoid delays in projects," European Journal of Operational Research, Elsevier, vol. 275(2), pages 608-620.
    8. 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.
    9. Olga Chiappinelli, 2017. "Decentralization and Public Procurement Performance: New Evidence from Italy," Discussion Papers of DIW Berlin 1704, DIW Berlin, German Institute for Economic Research.
    10. repec:eee:ejores:v:267:y:2018:i:1:p:368-380 is not listed on IDEAS
    11. Min-Ren Yan, 2015. "Project-Based Market Competition and Policy Implications for Sustainable Developments in Building and Construction Sectors," Sustainability, MDPI, Open Access Journal, vol. 7(11), pages 1-26, November.
    12. Di Corato, Luca & Dosi, Cesare & Moretto, Michele, 2015. "Multidimensional auctions for long-term procurement contracts under the threat of early exit: the case of conservation auctions," Working Paper Series 2015:6, Swedish University of Agricultural Sciences, Department Economics.
    13. Giuseppe Gori & Patrizia Lattarulo & Marco Mariani, 2014. "The effect of Regional Law 35/2011 on strategic public works," Studi e approfondimenti 521, Istituto Regionale per la Programmazione Economica della Toscana.

    More about this item

    Keywords

    Strategic Time Overruns; Public Procurement; Real Options;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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