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Study on Cost-shifting in Cost Reimbursement type of Defense Contracts  

Lee, Jeong-Dong (서울대학교 공과대학)
Lee, Chun-Ju (서울대학교)
Jung, Kyeong-In (서울대학교)
Publication Information
Journal of the military operations research society of Korea / v.31, no.2, 2005 , pp. 1-12 More about this Journal
Abstract
Defense firms' excess profitability by shifting common overhead costs from non-defense sector to defense sector in the award of cost reimbursement type of defense contracts is a widespread conclusion in prior researches. In this paper, we reviewed cost-shifting incentives in defense-contracting firms and extended the analysis of McGowan and Vendrzyk(2002) by applying modified model to Korea Defense Contracts. We formulated six hypotheses to test the relation of cost-shifting and excess profitability regarding market openness, auditing system, ranking in defense contracts, and firm types(sole defense contractors, sole non-defense contractors, and defense and non-defense mixed contractors). But, we could not find any evidence that defense firms shifted costs from non-defense sector to defense sector for the period 1997-2002. The results suggest that the excess profitability of Korea defense firms may not be from the cost-shifting but from other reasons.
Keywords
cost-shifting; auditing; defense contract; firm-types; profitability; competition;
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