The Cost of Contract Renegotiation: Evidence from the Local Public Sector
Philippe Gagnepain, Marc Ivaldi, David Martimort
American Economic Review · 2013 · Volume 103 · Issue 6
Abstract
Contract theory claims that renegotiation prevents attainment of the efficient solution that could be obtained under full commitment. Assessing the cost of renegotiation remains an open issue from an empirical viewpoint. We fit a structural principal-agent model with renegotiation on a set of contracts for urban transport services. The model captures two important features of the industry as only two types of contracts are used (fixed price and cost-plus) and subsidies are greater following a cost-plus contract than following a fixed price one. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators.
Keywords
Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory, Economics of Regulation, Railroads and Other Surface Transportation, Transportation Economics: Government and Private Investment Analysis, Road Maintenance, Transportation Planning, Transportation Economics: Government Pricing and Policy
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