Contracting for Infrastructure Projects as Credence Goods

Uwe Dulleck and Jianpei Li ()
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Jianpei Li: University of International Business and Economics

No 73, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Large infrastructure projects are a major responsibility of government, who usually lacks expertise to fully specify the demanded projects. Contractors, typically experts on such projects, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model the contracting for such infrastructure projects taking into account this credence goods feature and examine the performance of commonly used contracting methods. We show that when building costs are public information, multistage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. While the latter leads to minimum design effort, sequential search suffers from a commitment problem. If building costs are the private information of the contractors and are revealed to them after design cost is sunk, competitive bidding may involve sampling more than two contractors. The commitment problem under sequential search may be overcome by the procurer's incentive to search for low building cost if the design cost is sufficiently low. If this is the case, sequential search may outperform competitive bidding.

Keywords: Credence Goods; Design-Build; Competitive Bidding; Sequential Search; Infrastructure Projects (search for similar items in EconPapers)
JEL-codes: D44 D82 L14 R50 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2011-10-05
New Economics Papers: this item is included in nep-cta and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Contracting for Infrastructure Projects as Credence Goods (2015)
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