Auditing cost overrun claims

David Pérez-Castrillo, Nicolas Riedinger

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)

Abstract

We consider a cost-reimbursement or a cost-sharing procurement contract between the administration and a firm. The firm privately learns the true cost overrun once the project has started and it can manipulate this information. We characterize the optimal auditing policy of cost overrun claims as a function of the initial contractual payment, the share of the cost overrun paid by the administration, the cost and the accuracy of the auditing technology, and the penalty rate that can be imposed on fraudulent firms. The optimal policy is very simple and can be easily implemented through a bureaucratic procedure. © 2004 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)267-285
JournalJournal of Economic Behavior and Organization
Volume54
DOIs
Publication statusPublished - 1 Jun 2004

Keywords

  • Auditing
  • Cost overruns
  • Procurement

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