Contracting for infrastructure projects as credence goods

Dulleck, Uwe, Gong, Jiong, & Li, Jianpei (2013) Contracting for infrastructure projects as credence goods. In Botticini, Maristella & Abbring, Jaap (Eds.) EEA-ESEM2013, European Economic Association and Econometric Society, Gothenburg, Sweden, pp. 1-21.

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Large infrastructure projects are a major responsibility of urban and regional governments, who usually lack expertise to fully specify the demanded projects. Contractors, typically experts on such projects due to experience with similar projects elsewhere, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model such infrastructure projects taking into account their credence goods feature and the costly design effort they require and examine the performance of commonly used contracting methods. We show that when building costs are homogeneous and public information, multi-stage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. If building costs are private information of the contractors and are revealed to them after design cost is sunk, sequential search may be superior to the other two methods.

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ID Code: 62831
Item Type: Conference Paper
Refereed: Yes
Additional URLs:
Keywords: Credence goods, Design-build, Competitive bidding, Sequential search, Infrastructure projects
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Deposited On: 25 Sep 2013 00:34
Last Modified: 18 Mar 2014 05:52

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