Competition and cost overruns. Optimal misspecification of procurement contracts

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Ganuza, Juan-José. Competition and cost overruns. Optimal misspecification of procurement contracts. 1998
To cite or link this document: Ganuza, Juan-José
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa 1998-10-01
dc.description.abstract Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper deals with the problem of design specification in public procurement and provides a rationale for design misspecification. We propose a model in which the sponsor decides how much to invest in design specification and awards competitively the project to a contractor. After the project has been awarded the sponsor engages in bilateral renegotiation with the contractor, in order to accommodate changes in the initial project’s design that new information makes desirable. When procurement takes place in the presence of horizontally differentiated contractors, the design’s specification level is seen to affect the resulting degree of competition. The paper highlights this interaction between market competition and design specification and shows that the sponsor’s optimal strategy, when facing an imperfectly competitive market supply, is to underinvest in design specification so as to make significant cost overruns likely. Since no such misspecification occurs in a perfectly competitive market, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 471
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.title Competition and cost overruns. Optimal misspecification of procurement contracts
dc.type info:eu-repo/semantics/workingPaper 2014-06-03T07:14:01Z
dc.subject.keyword Microeconomics
dc.subject.keyword cost overruns
dc.subject.keyword procurement contracts
dc.subject.keyword strategic ignorance
dc.rights.accessRights info:eu-repo/semantics/openAccess

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