Political renegotiation of regulatory contracts
AbstractGovernmental contracts may be renegotiated after political changes. Current governments can anticipate this and strategically distort contracts to influence renegotiation outcomes. In this sequential common agency game, the initial contract impacts elements of the renegotiation process: outside options (a `leverage' effect), and the beliefs of the new government through partial information revelation (a `strategic' effect). We characterize the optimal initial contract, as a function of political stability, time preference, and profits appropriation by the initial government. It always entails either full separation or strategic, partial, information revelation. Last, institutional rules imposing immediate payments to the firm help limit output distortions.
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Length: 46 pages
Date of creation: 15 Jun 2005
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Renegotiation; Political uncertainty; Regulation.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
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- NEP-ALL-2005-06-27 (All new papers)
- NEP-COM-2005-06-27 (Industrial Competition)
- NEP-MIC-2005-06-27 (Microeconomics)
- NEP-POL-2005-06-27 (Positive Political Economics)
- NEP-REG-2005-06-27 (Regulation)
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