Game Theory Framework for Mitigating the Cost Pendulum in Public Construction Projects

Yahel Giat () and Amichai Mitelman
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Yahel Giat: Department of Industrial Engineering, Jerusalem College of Technology, Jerusalem 9116001, Israel
Amichai Mitelman: Department of Civil Engineering, Ariel University, Ariel 4070000, Israel

Games, 2025, vol. 16, issue 2, 1-14

Abstract: The coexistence of the winner’s curse and cost overruns in the construction industry implies a cost pendulum in which the winning bid is undervalued, whereas the final payment to the contractor is overvalued. We posit that this results from a strategic interaction between three stakeholders: the public agency (PA), the project manager (PM), and the winning contractor, and we propose a game-theoretic framework to model this dynamic. In the current state of practice, the subgame between the contractor and the PM leads to opportunistic contractor behavior and lenient supervision, resulting in increased costs for the PA. We analyze how procedural and cultural interventions by the PA, specifically shifting from a low-bid to an average-bid auction and incentivizing stricter PM oversight, alter the strategic equilibrium. Our findings indicate that while each change alone provides limited improvement, implementing both significantly reduces cost overruns by aligning stakeholder incentives. The findings of this analysis provide insight into how public agencies can mitigate the widespread problem of cost overruns.

Keywords: project management; construction; cost overruns; public tenders; opportunism (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2025
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