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

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  • Philippe Gagnepain
  • Marc Ivaldi
  • David Martimort

Abstract

Contract theory claims that renegotiation prevents attainment of the efficient solution that could be obtained under full commitment. Assessing the cost of renegotiation remains an open issue from an empirical viewpoint. We fit a structural principal-agent model with renegotiation on a set of contracts for urban transport services. The model captures two important features of the industry as only two types of contracts are used (fixed price and cost-plus) and subsidies are greater following a cost-plus contract than following a fixed price one. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators.

Suggested Citation

  • Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
  • Handle: RePEc:aea:aecrev:v:103:y:2013:i:6:p:2352-83
    Note: DOI: 10.1257/aer.103.6.2352
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    References listed on IDEAS

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    Cited by:

    1. Maria Börjesson & Chau Man Fung & Stef Proost, 2015. "Should buses still be subsidized in Stockholm?," Working Papers Department of Economics 518627, KU Leuven, Faculty of Economics and Business, Department of Economics.
    2. repec:bla:jpbect:v:20:y:2018:i:5:p:742-756 is not listed on IDEAS
    3. Börjesson, Maria & Fung, Chau Man & Proost, Stef, 2017. "Optimal prices and frequencies for buses in Stockholm," Economics of Transportation, Elsevier, vol. 9(C), pages 20-36.
    4. Lalive, Rafael & Schmutzler, Armin, 2011. "Auctions vs Negotiations in Public Procurement: Which Works Better?," CEPR Discussion Papers 8538, C.E.P.R. Discussion Papers.
    5. Gine,Xavier & Jacoby,Hanan G. & Gine,Xavier & Jacoby,Hanan G., 2016. "Markets, contracts, and uncertainty in a groundwater economy," Policy Research Working Paper Series 7694, The World Bank.
    6. repec:bla:jindec:v:65:y:2017:i:1:p:1-38 is not listed on IDEAS
    7. De Borger, Bruno & Proost, Stef, 2015. "The political economy of public transport pricing and supply decisions," Economics of Transportation, Elsevier, vol. 4(1), pages 95-109.
    8. Magali Chaudey, 2017. "Why test the theory of incentives in a dynamic framework?," Working Papers 1733, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    9. repec:eee:juipol:v:48:y:2017:i:c:p:176-183 is not listed on IDEAS
    10. repec:eee:transa:v:111:y:2018:i:c:p:174-186 is not listed on IDEAS
    11. Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying & Zhang, Shuai-Jun, 2016. "Subsidizing and pricing private toll roads with noncontractible service quality: A relational contract approach," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 466-491.
    12. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    13. repec:eee:transe:v:118:y:2018:i:c:p:184-206 is not listed on IDEAS
    14. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.
    15. Elisabetta Iossa & David Martimort, 2011. "The Theory of Incentives Applied to the Transport Sector," Chapters,in: A Handbook of Transport Economics, chapter 29 Edward Elgar Publishing.
    16. repec:eee:transb:v:112:y:2018:i:c:p:40-72 is not listed on IDEAS
    17. repec:eee:transa:v:107:y:2018:i:c:p:106-125 is not listed on IDEAS
    18. Guillermo Díaz & Vincent Charles, 2016. "Regulatory design and technical efficiency: public transport in France," Journal of Regulatory Economics, Springer, vol. 50(3), pages 328-350, December.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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