Reputation and Contractual Performance in Long-Term Projects

The systematic cost overruns occurring in large-scale, long-term projects are rationalized as the outcome of the bilateral relationship between the sponsor and contractor in which neither party can credibly commit himself to a course of action over time. We model this long-term relationship as a sequential game in which funding for the project is based on the performance of the contractor to date. Contractors will typically work hard initially to keep costs down to increase the chances that the project will be continued. The sponsor is aware of this behavior when processing information on costs to determine whether to continue the project. We analyze the equilibrium of this process and investigate its temporal properties.