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The impact of economic factors and acquisition reforms on the cost of defense weapon systems

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  • James P. Smirnoff
  • Michael J. Hicks

Abstract

This paper evaluates how defense budget instability, consolidation of the defense industry, acquisition reform, war, and cost estimating error are related to cost overruns in major Department of Defense Acquisition projects from 1979 to 2002. Employing a panel model of service specific cost overruns, with fixed effects, we find that funding instability in O&M and R&D budgets had large impacts on procurement costs overruns. We further found that unexpected inflation and armed conflict led to higher levels of Procurement cost overruns. Finally we found that the acquisition reforms of the Nunn–McCurdy Act of 1982, the Packard Commission Recommendations of 1986 and the Federal Acquisition Streamlining Act (FASA) of 1994 resulted in significant reductions in procurement cost overruns.

Suggested Citation

  • James P. Smirnoff & Michael J. Hicks, 2008. "The impact of economic factors and acquisition reforms on the cost of defense weapon systems," Review of Financial Economics, John Wiley & Sons, vol. 17(1), pages 3-13.
    • Handle: RePEc:wly:revfec:v:17:y:2008:i:1:p:3-13
    DOI: 10.1016/j.rfe.2007.02.005
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    1. A. Bhargava & L. Franzini & W. Narendranathan, 2006. "Serial Correlation and the Fixed Effects Model," World Scientific Book Chapters, in: Econometrics, Statistics And Computational Approaches In Food And Health Sciences, chapter 4, pages 61-77, World Scientific Publishing Co. Pte. Ltd..
    2. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
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    1. Jonathan D. Ritschel, 2012. "Efficacy of US Legislation in Military Acquisition Programmes: N unn– M cCurdy Act Unveiled," Economic Papers, The Economic Society of Australia, vol. 31(4), pages 491-500, December.
    2. Marcus Matthias Keupp, 2021. "Effectiveness of Military Performance," Springer Books, in: Defense Economics, chapter 0, pages 67-91, Springer.
    3. Leonardo M. Giuffrida & Gabriele Rovigatti, 2022. "Supplier selection and contract enforcement: Evidence from performance bonding," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(4), pages 980-1019, November.
    4. Eduard Calvo & Ruomeng Cui & Juan Camilo Serpa, 2019. "Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis," Management Science, INFORMS, vol. 65(12), pages 5651-5675, December.

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