DOCUMENT

ART - FINANCING INFRASTRUCTURE: FIXED PRICE VS. PRICE INDEX CONTRACTS 2008

  • YEAR CREATED: 2008
  • ENTITY TYPE: Scholarly Publication
  • TYPE OF DOCUMENT: ART - Article, Paper, Review, Survey, Report
The document is a research paper that examines the use of fixed price contracts versus price index contracts in financing infrastructure projects, with a specific focus on road construction and the use of liquid asphalt cement. The authors analyze the impact of these two types of contracts through a qualitative and quantitative analysis. They find that an indexed price system, particularly for liquid asphalt cement, does not provide a reduction in costs compared to a firm fixed price system. The study is important for state financial managers as they consider the efficient use of resources invested in state infrastructure, particularly in road construction projects. The paper also discusses the problems of moral hazard and adverse selection that arise from asymmetric information between the government and the contractor in the bidding process. The authors explore different types of long-term contracts, including firm fixed price contracts, cost plus fixed fee contracts, and cost plus incentive fee contracts. They suggest that price index models, which are commonly used in infrastructure provision, have not been thoroughly studied and assess the financial implications of these models, specifically in relation to liquid asphalt cement. The paper concludes by discussing the use of price index contracts and the benefits of price indexing in reducing long-term costs, with a focus on the challenges and limitations of using price indexing for liquid asphalt cement in road construction projects.
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