Time Overruns as Opportunistic Behavior in Public Procurement

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.


Subject(s):
Issue Date:
2012-10
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/139507
Total Pages:
78
JEL Codes:
D81; H54; H57; L51
Series Statement:
ES
78.2012




 Record created 2017-04-01, last modified 2017-08-26

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