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Contracting for Infrastructure Projects as Credence Goods


  • Uwe Dulleck

    () (QUT)

  • Jianpei Li

    () (University of International Business and Economics)


Large infrastructure projects are a major responsibility of government, who usually lacks expertise to fully specify the demanded projects. Contractors, typically experts on such projects, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model the contracting for such infrastructure projects taking into account this credence goods feature and examine the performance of commonly used contracting methods. We show that when building costs are public information, multistage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. While the latter leads to minimum design effort, sequential search suffers from a commitment problem. If building costs are the private information of the contractors and are revealed to them after design cost is sunk, competitive bidding may involve sampling more than two contractors. The commitment problem under sequential search may be overcome by the procurer's incentive to search for low building cost if the design cost is sufficiently low. If this is the case, sequential search may outperform competitive bidding.

Suggested Citation

  • Uwe Dulleck & Jianpei Li, 2011. "Contracting for Infrastructure Projects as Credence Goods," NCER Working Paper Series 73, National Centre for Econometric Research.
  • Handle: RePEc:qut:auncer:2011_4

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    References listed on IDEAS

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    Cited by:

    1. Helmut Bester & Matthias Dahm, 2014. "Credence Goods, Costly Diagnosis, and Subjective Evaluation," Discussion Papers 2014-13, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    2. Li, Jianpei & Ouyang, Yaofu, 2016. "Expert Costs and the Role of Verifiability," MPRA Paper 74390, University Library of Munich, Germany.

    More about this item


    Credence Goods; Design-Build; Competitive Bidding; Sequential Search; Infrastructure Projects;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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