'It is Never Too Late': Optimal Penalty for Investment Delay in Italian Public Procurement Contracts

36 Pages Posted: 1 Oct 2009 Last revised: 29 Nov 2009

See all articles by Chiara D'Alpaos

Chiara D'Alpaos

University of Brescia - Department of Economics

Michele Moretto

University of Padua, Dep of Economics and Management

Paola Valbonesi

University of Padua - Department of Economics and Management, DSEA

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2009

Abstract

This paper provides a general framework to determine the optimal penalty fee to induce a contractor to respect the contracted delivery date in public procurement contracts (PPCs). We did this by i) developing a real option model to evaluate the investment timing flexibility that the inclusion of a penalty clause in the contract gives the contractor; ii) investigating the probability of enforcing the penalty rule which is here assumed to be negatively affected by the quality of the judicial system and by the discretionality of the court in voiding the penalty rule itself. Our model shows that the optimal penalty fee increases as the uncertainty over the contracts investment costs increases and the probability of the penalty enforcement decreases Using parameters which mimic the Italian context, we then calibrate the model to evaluate the range of penalties set by the Italian legislation on PPCs. According to our calibrations, the optimal penalty fees result highly sensitive to the quality of the judicial system and to the discretional power of courts of law: in particular, the optimal penalty for delay in PPCs should be of different level in the different Italian macro-regions and, in some cases, much higher than that set according to the present Italian law.

Suggested Citation

D'Alpaos, Chiara and Moretto, Michele and Valbonesi, Paola and Vergalli, Sergio, 'It is Never Too Late': Optimal Penalty for Investment Delay in Italian Public Procurement Contracts (September 30, 2009). FEEM Working Paper No. 78.2009. Available at SSRN: https://ssrn.com/abstract=1480610 or http://dx.doi.org/10.2139/ssrn.1480610

Chiara D'Alpaos

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy
+39 030 2988837 (Fax)

Michele Moretto

University of Padua, Dep of Economics and Management ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

Paola Valbonesi

University of Padua - Department of Economics and Management, DSEA ( email )

via Del Santo 33
Padova, 35123
Italy
+39+049+8274058 (Phone)

HOME PAGE: http://www.decon.unipd.it

Sergio Vergalli (Contact Author)

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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