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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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    More about this item

    Keywords

    Public Procurement; Fixed-price Contracts; Real Options; Time Overruns; Scoring Auctions; Liquidated Damages;
    All these keywords.

    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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