Time Overruns as Opportunistic Behavior in Public Procurement

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.

Court Efficiency and Procurement Performance

“…Similar empirical evidence on the delay in delivery of Italian public procurement contracts has been also found byDecarolis and Palumbo (2011);Coviello and Gagliarducci (2010);Coviello and Mariniello (2008);Guccio et al (2007);Decarolis (2013);D'Alpaos et al (2013),Bucciol et al (2013).…”

Court Efficiency and Procurement Performance

“…D’Alpaos et al . () developed a model in which – if penalties for late delivery are included in the contract – the supplier's choice concerning the execution time can be investigated as a real option (i.e., a put option); in such a setting, the supplier's choice is affected by the volatility of investment costs and by the enforcement of penalty clauses. Lewis and Bajari () investigated how higher penalties for delivery delays can induce greater effort, but can also increase the agent's risk in performing the contract.…”

Political Connections and Allocative Distortions

“…For a comprehensive sample of public procurement contracts in Italy with a set of contract types and average contract size similar to the data used in this paper, D'Alpaos et al. () and Guccio, Pignataro, and Rizzo () provide data on the length of delays. Matching their descriptive statistics to the contract types in this paper, the weighted average of delays relative to the initial contract length is 54.84%, similar to the estimate for the United States.…”