Infrastructure Underpinnings of Trustworthiness in Infrastructure Contracts: Trust and Trust Perceptions
AbstractThis paper discusses trust and trust perceptions in infrastructure contracts. We focus on perceptions of the trustworthiness of the government purchasers of infrastructure services (a) by supplying companies and (b) by governments. In particular, we allow for trust misalignments which may give rise to "undertrusting" and "overtrusting". The core of the paper sets out a game theoretic model of contracts which we use to explore the impact of trust misalignment both on economic efficiency and on investment levels, taking account both of asset specificity issues and maladaptation costs. We explore flexible contracts with and without pre-payments, rigid contracts (which do not allow for post-investment renegotiation) and hybrid contracts. Their efficiency is compared to an incentive compatible benchmark contract. The model is also used to shed light on current issues on the sustainability of private investment infrastructure contracts both in OECD countries (e.g. PPPs) and in developing countries.
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Bibliographic InfoPaper provided by Regulation2point0 in its series Working paper with number 241.
Date of creation: Apr 2008
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