Equilibrium cost overruns

Chen, Y. and Smith, Ron P. (2001) Equilibrium cost overruns. Annals of Economics and Finance 2 (2), pp. 401-414. ISSN 1529-7373.

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Abstract

Cost overruns are endemic in military procurement projects and pervasive in other areas. This paper studies a model in which the apparent cost overruns arise not as systematic expectational errors but as equilibrium phenomena. The possibility of renegotiating payments when cost overruns occur results in firms bidding below their true estimate of expected project costs. This can cause the initial price for a project to be consistently lower than its expected cost, and hence the persistence of cost overruns in equilibrium. The tradeoff between selecting the lowest cost source and inducing efficient investment effort is explored.

Metadata

Item Type:	Article
School:	School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User:	Sarah Hall
Date Deposited:	03 Nov 2020 16:18
Last Modified:	30 Nov 2021 11:23
URI:	https://eprints.bbk.ac.uk/id/eprint/41128

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