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

36 Pages Posted: 9 Nov 2009 Last revised: 23 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: November 4, 2009

Abstract

We provide a general framework in which to determine the optimal penalty fee inducing the contractor to respect the contracted delivery date in public procurement contracts (PPCs). We do this by developing a real option model that enables us to investigate the contractor’s value of investment timing flexibility which the penalty rule - de facto - introduces. We then apply this setting in order to evaluate the range of penalty fees in the Italian legislation on PPCs. According to our calibration analysis, there is no evidence that the substantial delays recorded in the execution times of Italian PPCs are due to incorrectly set penalty fees. This result opens the way for other explanations of delays in Italian PPCs: specifically, we extend our model to investigate the probability of enforcing a penalty which we assume negatively affected by the "quality" of the judicial system and the discretionality of the court in voiding the rule. Our simulations show that the penalty fee is highly sensitive to the "quality" of the judicial system. Specifically referring to the Italian case, we show that the optimal penalty should be higher than those set according to the present Italian law.

Keywords: Public Procurement Contracts, Penalty Fee, Investment Timing Flexibility, Contract

JEL Classification: L33, H57, D81

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 (November 4, 2009). FEEM Working Paper No. 78.2009. Available at SSRN: https://ssrn.com/abstract=1499767 or http://dx.doi.org/10.2139/ssrn.1499767

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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