Auditing Cost Overrun Claims

David Perez-Castrillo and Nicolas Riedinger
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Nicolas Riedinger: ENSAE, Paris

No 1999-12, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: We consider a cost-reimbursement or a cost-sharing procurement contract between the administration and a firm. The firm privately learns the true cost overrun once the project has started and it can manipulate this information. We characterize the optimal auditing policy of cost overrun claims as a function of the initial contractual payment, the share of the cost overrun paid by the administration, the cost and the accuracy of the auditing technology, and the penalty rate that can be imposed on fraudulent firms. We also show that this possibility of misreporting reduces the set of projects carried out and biases the choice of the quality level of those projects that the administration carries out.

Keywords: cost overruns; auditing; procurement (search for similar items in EconPapers)
JEL-codes: D82 H57 L50 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1999-09
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Journal Article: Auditing cost overrun claims (2004)
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