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"It Is Never too late": Optimal Penalty for Investment Delay in Public Procurement Contracts

Author

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  • D'Alpaos, Chiara
  • Moretto, Michele
  • Valbonesi, Paola
  • Vergalli, Sergio
Abstract
We provide a general framework in which to determine the optimal penalty fee inducing the contractor to respect the contracted delivery date in public procurement contracts (PPCs). We do this by developing a real option model that enables us to investigate the contractor’s value of investment timing flexibility which the penalty rule - de facto - introduces. We then apply this setting in order to evaluate the range of penalty fees in the Italian legislation on PPCs. According to our calibration analysis, there is no evidence that the substantial delays recorded in the execution times of Italian PPCs are due to incorrectly set penalty fees. This result opens the way for other explanations of delays in Italian PPCs: specifically, we extend our model to investigate the probability of enforcing a penalty which we assume negatively affected by the "quality" of the judicial system and the discretionality of the court in voiding the rule. Our simulations show that the penalty fee is highly sensitive to the "quality" of the judicial system. Specifically referring to the Italian case, we show that the optimal penalty should be higher than those set according to the present Italian law.

Suggested Citation

  • D'Alpaos, Chiara & Moretto, Michele & Valbonesi, Paola & Vergalli, Sergio, 2009. ""It Is Never too late": Optimal Penalty for Investment Delay in Public Procurement Contracts," Institutions and Markets Papers 54351, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemim:54351
    DOI: 10.22004/ag.econ.54351
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    Cited by:

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    2. Cesare Dosi & Michele Moretto, 2015. "Procurement with Unenforceable Contract Time and the Law of Liquidated Damages," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(1), pages 160-186.
    3. Alessandro Fedele & Paolo M. Panteghini & Sergio Vergalli, 2011. "Optimal Investment and Financial Strategies under Tax‐Rate Uncertainty," German Economic Review, Verein für Socialpolitik, vol. 12(4), pages 438-468, November.
    4. Chiara D’Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2013. "Time overruns as opportunistic behavior in public procurement," Journal of Economics, Springer, vol. 110(1), pages 25-43, September.
    5. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains taxation in the real world," Working Papers 0910, University of Brescia, Department of Economics.
    6. Bergantiños, Gustavo & Lorenzo, Leticia, 2019. "How to apply penalties to avoid delays in projects," European Journal of Operational Research, Elsevier, vol. 275(2), pages 608-620.
    7. Rosella Levaggi & Francesco Menoncin, 2009. "Decentralized provision of merit and impure public goods," Working Papers 0909, University of Brescia, Department of Economics.
    8. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    9. Alessandro Fedele & Raffaele Miniaci, 2010. "Do Social Enterprises Finance Their Investments Differently from For-profit Firms? The Case of Social Residential Services in Italy," Journal of Social Entrepreneurship, Taylor & Francis Journals, vol. 1(2), pages 174-189, October.
    10. Marina Cavalieri & Rossana Cristaudo & Livio Ferrante & Calogero Guccio, 2019. "Does the Project Design Matter for the Performance of Infrastructure Execution? An Assessment for Italy," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 5(1), pages 39-77, March.
    11. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.
    12. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    13. Monica Billio & Roberto Casarin, 2010. "Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis," Working Papers 1002, University of Brescia, Department of Economics.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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