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Title:Procurement with unenforceable contract time and the law of liquidated damages PDF Logo
Authors:Dosi, Cesare
Moretto, Michele
Issue Date:2012
Series/Report no.:Nota di lavoro, Fondazione Eni Enrico Mattei: Economy and Society 45.2012
Abstract:Time overruns are common in public works and are not confined to inherently complex tasks. One explanation advanced in this paper is that bidders can undergo unpredictable changes in production costs which generate an option value of waiting. By exploiting the real-option approach, we examine how the inability to force sellers to meet the contract time influences their bidding behaviour, and how this can ultimately affect the parties' expected payoffs. Further, we examine the outcome of the bidding process when legal rules prevent the promisee from contracting for damage measures which would grant more than her lost expectation. We show that when the pre-agreed compensatory payments prove insufficient to discourage delayed orders, setting a liquidated damages clause would not lead to a Pareto superior outcome with respect to the no-damage-for delay condition. While such a clause would increase the seller's expected payoff, the buyer's expected payoff is lower than when the contract does not provide for any compensation for late-delivery.
Subjects:Public Procurement
Fixed-Price Contracts
Cost Uncertainty
Time Overruns
Liquidated Damages
Real Options
JEL:C61
D44
D86
K12
Document Type:Working Paper
Appears in Collections:FEEM Working Papers, Fondazione Eni Enrico Mattei

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