Infrastructure Contracts: Trust and Institutional Updating
AbstractThis paper discusses trust and trust perceptions in infrastructure contracts and supporting institutions. We focus on perceptions of the trustworthiness of the government purchasers of infrastructure services by the supplying companies and by the governments themselves. In particular, we allow for trust updating and trust misalignments which may give rise to "undertrusting" and "overtrusting". The core of the paper sets out a game theoretic model of contracts with dynamic adjustment of trust perceptions, which we use to explore the impact of trust misalignment both on economic efficiency (measured by expected welfare) and on investment levels. We explore flexible contracts with and without pre-payments, rigid contracts (which do not allow for post-investment renegotiation) and hybrid contracts. We then compare the efficiency of the flexible contracts to that of hybrid contracts using as a criterion the expected welfare implications of each contract. The model is used to shed light on current issues on the sustainability of private investment infrastructure contracts in developed and in developing countries, including the role of regulatory institutions.
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Bibliographic InfoPaper provided by Department of Economics, City University London in its series Working Papers with number 08/06.
Date of creation: 2008
Date of revision:
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Contracts; infrastructure; institutions; regulation; trust;
Other versions of this item:
- Xeni Dassiou & Jon Stern, 2009. "Infrastructure Contracts: Trust and Institutional Updating," Review of Industrial Organization, Springer, vol. 35(1), pages 171-216, September.
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L78 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Government Policy
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