Time Overruns in Public Procurement and Concession Contracts: Penalty Fee and Option Value to Delay

6 Pages Posted: 15 Mar 2014

See all articles by Chiara D'Alpaos

Chiara D'Alpaos

University of Brescia - Department of Economics

Sergio Vergalli

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

Date Written: March 13, 2014

Abstract

Evidence from ongoing procurement and concession contracts shows that time overruns are widespread. Two key elements, among others, can affect the delays in the execution of the contracts: a) uncertainty over production costs; b) inefficiency in the judicial system. In this article we summarize a couple of works (D'Alpaos et al., 2013 and D'Alpaos and Moretto, 2013), in which the authors theoretically and empirically investigate some causes of time overruns in public procurement and concession contracts and determine the trade-off between the supplier’s option value to delay and the penalty fee to be paid in the event of delay. The main results are tested on Italian public procurement data and show that the supplier's incentive to delay is greater the higher the volatility of production costs and the lower the "efficiency" of the judicial system.

Keywords: Procurement and Concession Contracts, Option Value to Delay, Strategic time overruns

JEL Classification: D81, H54, H57, L51

Suggested Citation

D'Alpaos, Chiara and Vergalli, Sergio, Time Overruns in Public Procurement and Concession Contracts: Penalty Fee and Option Value to Delay (March 13, 2014). Review of Environment, Energy and Economics (Re3), March 2014, Available at SSRN: https://ssrn.com/abstract=2408592

Chiara D'Alpaos

University of Brescia - Department of Economics ( email )

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

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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