Procurement with Unenforceable Contract Time and the Law of Liquidated Damages

dosi, cesare ; moretto, michele;

Time overruns are common in public projects and are not confined to inherently
complex tasks. One explanation is that sellers can undergo changes in production
costs which generate a value of waiting. Using the real-option approach, we
examine the effects of the lack of incentives for on-time delivery on competitive
bids for a fixed-price procurement contract. Next, we analyze the effects of
liquidated damages aimed at protecting the buyer for the expected losses
due to project delays. We show that when the expectation damage measure
fails to discourage time overruns, a liquidated damages stipulation does not
lead to a Pareto superior outcome. Although liquidated damages tend to
make the seller better off, the buyer�s expected payoff is lower than when
the contract does not provide for any damages for breach