EconPapers    
Economics at your fingertips  
 

Equilibrium Cost Overruns

Yongmin Chen () and Ronald Smith ()

Annals of Economics and Finance, 2001, vol. 2, issue 2, 401-414

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.

Keywords: Cost overrun; Procurement; Cost sharing; Bidding (search for similar items in EconPapers)
JEL-codes: H57 L14 D21 (search for similar items in EconPapers)
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.aeconf.net/Articles/Nov2001/aef020206.pdf (application/pdf)
http://down.aefweb.net/AefArticles/aef020206.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2001:v:2:i:2:p:401-414

Access Statistics for this article

Annals of Economics and Finance is currently edited by Heng-fu Zou

More articles in Annals of Economics and Finance from Society for AEF Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().

 
Page updated 2020-05-20
Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:401-414