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The Cost of contract renegotiation: evidence from the local public sector

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  • Phillippe Gagnepain
  • Marc Ivaldi
  • David Martimort

Abstract

We construct and estimate a structural principal/agent model of contract renegotiation in the French urban transport sector in a context where operators are privately informed on their innate costs (adverse selection) and can exert cost-reducing managerial effort (moral hazard). This model captures two important features of the industry. First, only two types of contracts are used in practice by local public authorities to regulate the service: cost-plus and fixedprice contracts with positive subsidies. Second, these subsidies increase over time. Such increasing subsidies are consistent with the theoretical hypothesis that principals cannot commit not to renegotiate and contracts are renegotiationproof. We compare this situation to the hypothetical case with full commitment. The distribution of innate costs of operators is shifted upwards under this hypothetical scenario. The welfare gains of commitment are significant and accrue mostly to operators. Estimates of the weights that local governments give to the operator´s profit in their objective functions and of the social value of the cost-reducing managerial effort are obtained as by-products.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we096742.

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Date of creation: Sep 2009
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Handle: RePEc:cte:werepe:we096742

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Cited by:
  1. Rafael Lalive & Armin Schmutzler, 2011. "Auctions vs negotiations in public procurement: which works better?," ECON - Working Papers 023, Department of Economics - University of Zurich.
  2. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.

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