Journal of the military operations research society of Korea (한국국방경영분석학회지)

Military Operations Research Society of Korea (한국국방경영분석학회)
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Study on Cost-shifting in Cost Reimbursement type of Defense Contracts

개산형 방산계약에서의 원가이전에 관한 실증연구

  • Published : 2005.12.30
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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.

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References

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