Procurement with Unenforceable Contract Time and the Law of Liquidated Damages

27 Pages Posted: 2 Aug 2012

See all articles by Cesare Dosi

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica

Michele Moretto

University of Padua, Dep of Economics and Management

Date Written: August 2, 2012

Abstract

Time overruns are common in public works and are not confined to inherently complex tasks. One explanation advanced in this paper is that bidders can undergo unpredictable changes in production costs which generate an option value of waiting. By exploiting the real-option approach, we examine how the inability to force sellers to meet the contract time influences their bidding behavior, and how this can ultimately affect the parties’ expected payoffs. Further, we examine the outcome of the bidding process when legal rules prevent the promisee from contracting for damage measures which would grant more than her lost expectation. We show that when the pre-agreed compensatory payments prove insufficient to discourage delayed orders, setting a liquidated damages clause would not lead to a Pareto superior outcome with respect to the no-damage-for delay condition. While such a clause would increase the seller’s expected payoff, the buyer’s expected payoff is lower than when the contract does not provide for any compensation for late-delivery.

Keywords: public procurement, fixed-price contracts, cost uncertainty, time

JEL Classification: C61, D44, D86, K12

Suggested Citation

Dosi, Cesare and Moretto, Michele, Procurement with Unenforceable Contract Time and the Law of Liquidated Damages (August 2, 2012). FEEM Working Paper No. 45.2012. Available at SSRN: https://ssrn.com/abstract=2122297 or http://dx.doi.org/10.2139/ssrn.2122297

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica ( email )

via Del Santo 33
Padova, 35123
Italy
049+8274049 (Phone)
049+8274221 (Fax)

Michele Moretto (Contact Author)

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

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

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