Explaining Cost Overruns of Large-Scale Transportation Infrastructure Projects using a Signalling Game

TL;DR

This paper models strategic behaviour causing cost overruns in large transportation projects using a signalling game, highlighting how asymmetric information leads to miscommunication and proposing policy measures to mitigate this issue.

Contribution

It introduces a formal signalling game model to explain cost overruns and suggests policy interventions to reduce strategic misrepresentation.

Findings

Cost overruns result from inappropriate signals in the game.

Policy measures like accountability and benchmarking can reduce cost overruns.

The model links asymmetric information to strategic behaviour in project planning.

Abstract

Strategic behaviour is one of the main explanations for cost overruns. It can theoretically be supported by agency theory, in which strategic behaviour is the result of asymmetric information between the principal and agent. This paper 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.