Title

Explaining cost overruns of large-scale transportation infrastructure projects using a signalling game

Document Type

Journal Article

Publication Date

2013

Subject Area

economics - appraisal/evaluation, economics - capital costs, economics - operating costs

Keywords

cost overruns, transportation infrastructure, strategic behaviour, asymmetric information, signalling game

Abstract

Strategic behaviour is one of the main explanations for cost overruns. It can be theoretically supported by agency theory, in which strategic behaviour is the result of asymmetric information between the principal and agent. This article gives a formal account of this relation by a signalling game. This is a game with incomplete information which considers the way in which parties anticipate upon other parties’ behaviour in choosing a course of action. The game shows how cost overruns are the result of an inappropriate signal. This makes it impossible for the principal to distinguish between the types of agents, and hence, allows for strategic behaviour. It is illustrated how cost overruns can be avoided by means of two policy measures, e.g. an accountability structure and benchmarking.

Rights

Permission to publish the abstract has been given by Taylor&Francis, copyright remains with them.

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