Equilibrium Cost Overruns Journal Article uri icon

Overview

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.

publication date

  • January 1, 2001

Full Author List

  • Chen Y; Smith R

Additional Document Info

start page

  • 401

end page

  • 414

volume

  • 2

issue

  • 2