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Cost Uncertainty and Time Overruns in Public Procurement: a Scoring Auction for a Contract with Delay Penalties

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Listed:
  • Cesare Dosi

    (University of Padova and Centro di Ricerca Interuniversitario sull’Economia Pubblica (CRIEP))

  • Michele Moretto

    (University of Padova and Fondazione Eni Enrico Mattei (FEEM))

Abstract

Drawing on the real-options theory we analyse bidding behaviour in a sealed-bid-first-score procurement auction where suppliers, facing variable production costs, must simultaneously report the contract price and the cost level at which they intend to perform the project. We show that this award mechanism is potentially able to maximize total welfare. Next we look at the time incentives required to ensure compliance with the promised optimal trigger value. We show that ex-post efficiency may call for delay penalties higher than the anticipated harm caused by time overruns, in so doing questioning the efficiency rationale of existing liquidated damages rules.

Suggested Citation

  • 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.
  • Handle: RePEc:fem:femwpa:2017.02
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    References listed on IDEAS

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    1. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    2. 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.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, June.
    4. Triantis, Alexander J & Triantis, George G, 1998. "Timing Problems in Contract Breach Decisions," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 163-207, April.
    5. 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.
    6. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
    7. Decio Coviello & Luigi Moretti & Giancarlo Spagnolo & Paola Valbonesi, 2013. "Court Efficiency and Procurement Performance," "Marco Fanno" Working Papers 0164, Dipartimento di Scienze Economiche "Marco Fanno".
    8. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
    9. De Silva, Dakshina G. & Dunne, Timothy & Kankanamge, Anuruddha & Kosmopoulou, Georgia, 2008. "The impact of public information on bidding in highway procurement auctions," European Economic Review, Elsevier, vol. 52(1), pages 150-181, January.
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    11. Calzolari, Giacomo & Spagnolo, Giancarlo, 2009. "Relational Contracts and Competitive Screening," CEPR Discussion Papers 7434, C.E.P.R. Discussion Papers.
    12. Spagnolo, Giancarlo, 2012. "Reputation, competition, and entry in procurement," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 291-296.
    13. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, vol. 63(3), pages 591-620, May.
    14. Chiara D’Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2013. "Time overruns as opportunistic behavior in public procurement," Journal of Economics, Springer, vol. 110(1), pages 25-43, September.
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    More about this item

    Keywords

    Public Procurement; Fixed-price Contracts; Real Options; Time Overruns; Scoring Auctions; Liquidated Damages;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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