Time Overruns as Opportunistic Behavior in Public Procurement

25 Pages Posted: 10 Dec 2012

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

Date Written: December 10, 2012

Abstract

This paper considers the supplier’s strategic delivery lead time in a public procurement setting as the result of the firm’s opportunistic behavior on the optimal investment timing. In the presence of uncertainty on construction costs, we model the supplier’s option to defer the contract’s execution as a Put Option. We include in the model both the discretion of the court of law in enforcing contractual clauses (i.e. a penalty for delays) and the 'quality' of the judicial system. Then, we calibrate the model using parameters that mimic the Italian procurement for public works and calculate the maximum amount that a firm is 'willing to pay' (per day) to postpone the delivery date and infringe the contract provisions. Our results show that the incentive to delay is greater the higher the construction costs and their volatility, and the weaker the penalty enforcement by the courts of law.

Keywords: strategic time overruns, public procurement, real options

JEL Classification: D81, H54, H57, L51

Suggested Citation

D'Alpaos, Chiara and Moretto, Michele and Valbonesi, Paola and Vergalli, Sergio, Time Overruns as Opportunistic Behavior in Public Procurement (December 10, 2012). FEEM Working Paper No. 78.2012. Available at SSRN: https://ssrn.com/abstract=2187220 or http://dx.doi.org/10.2139/ssrn.2187220

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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