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Time overruns are common in public works and are not con…ned 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 in ‡uences their bidding behaviour, and how this can ultimately a¤ect the parties' expected payo¤s. 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 insu¢ cient 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 payo¤, the buyer's expected payo¤ is lower than when the contract does not provide for any compensation for late-delivery.
Time overruns are common in public works and are not con…ned 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 in ‡uences their bidding behaviour, and how this can ultimately a¤ect the parties' expected payo¤s. 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 insu¢ cient 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 payo¤, the buyer's expected payo¤ is lower than when the contract does not provide for any compensation for late-delivery.
[1] When assigning a concession contract, the regulator faces the issue of setting the concession length. Another key issue is whether or not the concessionaire should be allowed to set the timing of new investments. In this paper we investigate the impact of concession length and investment timing flexibility on the ''concession value.'' It is generally argued that long-term contracts are privately valuable as they enable a concessionaire to increase its overall discounted returns. Moreover, the real option theory suggests that investment flexibility has an intrinsic value, as it allows concessionaires to avoid costly errors. By combining these two conventional wisdoms one may argue that long-term contracts, which allow for investment timing flexibility, should always result in higher concession values. Our result suggests that this is not always the case; that is, investment flexibility and long-term contracts do not necessarily increase the concession value.Citation: D'Alpaos, C., C. Dosi, and M. Moretto (2006), Concession length and investment timing flexibility, Water Resour. Res., 42, W02404,
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