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Infrastructure Contracts: Trust and Institutional Updating

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  • Dassiou, X.
  • Stern, J.

Abstract

This 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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File URL: http://openaccess.city.ac.uk/1495/1/0806_dassiou%2Dstern.pdf
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Bibliographic Info

Paper provided by Department of Economics, City University London in its series Working Papers with number 08/06.

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Date of creation: 2008
Date of revision:
Handle: RePEc:cty:dpaper:08/06

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Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk
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Related research

Keywords: Contracts; infrastructure; institutions; regulation; trust;

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References

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  1. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November.
  2. Littlechild, S.C., 2001. "Competitive Bidding for a Long-term Electricity Distribution Contract," Cambridge Working Papers in Economics 0112, Faculty of Economics, University of Cambridge.
  3. Pablo T. Spiller, 2008. "An Institutional Theory of Public Contracts: Regulatory Implications," NBER Working Papers 14152, National Bureau of Economic Research, Inc.
  4. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-94, March.
  5. Anderson James E & Young Leslie, 2006. "Trade and Contract Enforcement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-36, November.
  6. Paul Levine & John Stern & Francesc Trillas, 2005. "Utility price regulation and time inconsistency: comparisons with monetary policy," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 447-478, July.
  7. repec:rne:rneart:v:1:y:2002:i:1:p:1-38 is not listed on IDEAS
  8. Luis Araujo & Emanuel Ornelas, 2005. "Trust-Based Trade," IBMEC RJ Economics Discussion Papers 2005-08, Economics Research Group, IBMEC Business School - Rio de Janeiro.
  9. Williamson, Oliver E, 1976. "The Economics of Internal Organization: Exit and Voice in Relation to Markets and Hierarchies," American Economic Review, American Economic Association, vol. 66(2), pages 369-77, May.
  10. J. Luis Guasch & Stéphane Straub, 2006. "Renegotiation Of Infrastructure Concessions: An Overview," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 479-493, December.
  11. Stéphane Saussier & Claude Ménard, 2000. "Contractual Choice and Performance the Case of Water Supply in France," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 385-404.
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Citations

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Cited by:
  1. de Brux, Julie, 2010. "The Dark and Bright Sides of Renegotiation: An Application to Transport Concession Contracts," Utilities Policy, Elsevier, vol. 18(2), pages 77-85, June.
  2. Pollitt, Michael & Stern, Jon, 2011. "Human resource constraints for electricity regulation in developing countries: Developments since 2001," Utilities Policy, Elsevier, vol. 19(2), pages 53-60, June.
  3. Wren-Lewis, Liam, 2013. "Commitment in utility regulation: A model of reputation and policy applications," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 210-231.

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