Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/330125 
Year of Publication: 
2025
Citation: 
[Journal:] Games [ISSN:] 2073-4336 [Volume:] 16 [Issue:] 2 [Article No.:] 11 [Year:] 2025 [Pages:] 1-14
Publisher: 
MDPI, Basel
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.
Subjects: 
project management
construction
cost overruns
public tenders
opportunism
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
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