Procurement with Unenforceable Contract Time and the Law of Liquidated Damages

Cesare Dosi, Michele Moretto
2012 Social Science Research Network  
Time overruns are common in public works and are not con...ned 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 in ‡uences their bidding behaviour, and how this can ultimately a¤ect the parties' expected payo¤s. Further, we examine the outcome of the
more » ... ng 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 insu¢ cient 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 payo¤, the buyer's expected payo¤ is lower than when the contract does not provide for any compensation for late-delivery.
doi:10.2139/ssrn.2122297 fatcat:objc6tb3bfc6xgcbblp7zsjgv4