  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.
