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The Cost of Contract Renegotiation: Evidence from the Local Public Sector

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  • Gagnepain, Philippe
  • Ivaldi, Marc
  • Martimort, David

Abstract

The renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts. However, assessing the cost of such renegotiation remains an open issue from an empirical viewpoint. To address this question, we fit a structural principal-agent model with renegotiation on a set of urban transport service contracts. The model captures two important features of the industry. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies increase over time. We compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 10-190.

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Date of creation: 14 Sep 2010
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Handle: RePEc:tse:wpaper:23209

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Cited by:
  1. Rafael Lalive & Armin Schmutzler, 2011. "Auctions vs negotiations in public procurement: which works better?," ECON - Working Papers, Department of Economics - University of Zurich 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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