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Infrastructure Contracts: Trust and Institutional Updating

  • Xeni Dassiou

    ()

  • Jon Stern

    ()

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://hdl.handle.net/10.1007/s11151-009-9221-4
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Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 35 (2009)
Issue (Month): 1 (September)
Pages: 171-216

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Handle: RePEc:kap:revind:v:35:y:2009:i:1:p:171-216
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100336

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  1. McMillan, John & Woodruff, Christopher, 1998. "Inter-Firm Relationships and Informal Credit in Vietnam," CEPR Discussion Papers 2036, C.E.P.R. Discussion Papers.
  2. Pablo T. Spiller, 2008. "An Institutional Theory of Public Contracts: Regulatory Implications," NBER Working Papers 14152, National Bureau of Economic Research, Inc.
  3. Luis Araujo & Emanuel Ornelas, 2007. "Trust-Based Trade," CEP Discussion Papers dp0820, Centre for Economic Performance, LSE.
  4. Littlechild Stephen, 2002. "Competitive Bidding for a Long-Term Electricity Distribution Contract," Review of Network Economics, De Gruyter, vol. 1(1), pages 1-38, March.
  5. 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.
  6. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  7. 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.
  8. 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.
  9. repec:rne:rneart:v:1:y:2002:i:1:p:1-38 is not listed on IDEAS
  10. 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.
  11. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-94, March.
  12. 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.
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