Regulating unproductive contract adaptation: A payment deduction mechanism

To the best of our knowledge, our paper offers a first attempt to uncover a payment deduction mechanism for regulating unproductive contract adaptation. Our model uncovers that the payment deduction mechanism can expropriate the ex post unproductive profit of a contractor. Using the data from California Department of Transportation, we confirm the positive effect of ex post payment deduction on ex post unproductive profit. Our estimates are robust to different estimation methods with different types of standard errors and the potential endogeneity bias. The payment deduction mechanism offers general applications to constrain ineffective contract implementation in the infrastructure industry.