IDEAS home Printed from https://ideas.repec.org/p/cte/werepe/we096742.html
   My bibliography  Save this paper

The Cost of contract renegotiation: evidence from the local public sector

Author

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

Abstract

We construct and estimate a structural principal/agent model of contract renegotiation in the French urban transport sector in a context where operators are privately informed on their innate costs (adverse selection) and can exert cost-reducing managerial effort (moral hazard). This model captures two important features of the industry. First, only two types of contracts are used in practice by local public authorities to regulate the service: cost-plus and fixedprice contracts with positive subsidies. Second, these subsidies increase over time. Such increasing subsidies are consistent with the theoretical hypothesis that principals cannot commit not to renegotiate and contracts are renegotiationproof. We compare this situation to the hypothetical case with full commitment. The distribution of innate costs of operators is shifted upwards under this hypothetical scenario. The welfare gains of commitment are significant and accrue mostly to operators. Estimates of the weights that local governments give to the operator´s profit in their objective functions and of the social value of the cost-reducing managerial effort are obtained as by-products.

Suggested Citation

  • Martimort, David & Ivaldi, Marc & Gagnepain, Philippe, 2009. "The Cost of contract renegotiation: evidence from the local public sector," UC3M Working papers. Economics we096742, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we096742
    as

    Download full text from publisher

    File URL: https://e-archivo.uc3m.es/bitstream/handle/10016/5249/09-67-42.pdf?sequence=1
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-235, April.
    2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    3. Harry F. Campbell, 1975. "Deadweight Loss and Commodity Taxation in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 8(3), pages 441-447, August.
    4. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 445-469, August.
    5. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
    6. Helmut Bester & Roland Strausz, "undated". "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
    7. Philippe Gagnepain & Marc Ivaldi, 2002. "Incentive Regulatory Policies: The Case of Public Transit Systems in France," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 605-629, Winter.
    8. 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.
    9. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    10. Isabelle Brocas & Kitty Chan & Isabelle Perrigne, 2006. "Regulation under Asymmetric Information in Water Utilities," American Economic Review, American Economic Association, vol. 96(2), pages 62-66, May.
    11. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    12. F. Gasmi & J. J. Laffont & W. W. Sharkey, 1999. "Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 61-93, March.
    13. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
    14. Jonathan Levin & Steven Tadelis, 2010. "CONTRACTING FOR GOVERNMENT SERVICES: THEORY AND EVIDENCE FROM U.S. CITIES -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 507-541, September.
    15. Bower, Anthony G, 1993. "Procurement Policy and Contracting Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 873-901, November.
    16. David P. Baron, 1988. "Regulation and Legislative Choice," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 467-477, Autumn.
    17. Richard Schmalensee, 1989. "Good Regulatory Regimes," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 417-436, Autumn.
    18. Kalt, Joseph P & Zupan, Mark A, 1990. "The Apparent Ideological Behavior of Legislators: Testing for Principal-Agent Slack in Political Institutions," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 103-131, April.
    19. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-1098, July.
    20. Mathias Dewatripont, 1989. "Renegotiation and information revelation over time: the case of optimal labor contacts," ULB Institutional Repository 2013/9573, ULB -- Universite Libre de Bruxelles.
    21. Frank A. Wolak, 1994. "An Econometric Analysis of the Asymmetric Information, Regulator-Utility Interaction," Annals of Economics and Statistics, GENES, issue 34, pages 1-12.
    22. Bester, Helmut & Strausz, Roland, 2007. "Contracting with imperfect commitment and noisy communication," Journal of Economic Theory, Elsevier, vol. 136(1), pages 236-259, September.
    23. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-437, Autumn.
    24. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    25. William P. Rogerson, 2003. "Simple Menus of Contracts in Cost-Based Procurement and Regulation," American Economic Review, American Economic Association, vol. 93(3), pages 919-926, June.
    26. Laffont, Jean-Jacques, 1996. "Industrial policy and politics," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 1-27.
    27. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    28. Kalt, Joseph P & Zupan, Mark A, 1984. "Capture and Ideology in the Economic Theory of Politics," American Economic Review, American Economic Association, vol. 74(3), pages 279-300, June.
    29. Hausman, Jerry A & Poterba, James M, 1987. "Household Behavior and the Tax Reform Act of 1986," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 101-119, Summer.
    30. Rey, Patrick & Salanie, Bernard, 1990. "Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting," Econometrica, Econometric Society, vol. 58(3), pages 597-619, May.
    31. William P. Rogerson, 1987. "On the Optimality of Menus of Linear Contracts," Discussion Papers 714, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    32. B. Caillaud & R. Guesnerie & P. Rey, 1992. "Noisy Observation in Adverse Selection Models," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 595-615.
    33. repec:adr:anecst:y:1994:i:34:p:02 is not listed on IDEAS
    34. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, March.
    35. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    36. Mathias Dewatripont, 1989. "Renegotiation and Information Revelation Over Time: The Case of Optimal Labor Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 589-619.
    37. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
    38. Rey, Patrick & Salanie, Bernard, 1996. "On the Value of Commitment with Asymmetric Information," Econometrica, Econometric Society, vol. 64(6), pages 1395-1414, November.
    39. Mookherjee Dilip & Reichelstein Stefan, 2001. "Incentives and Coordination in Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-38, April.
    40. Jonathan Levin & Steven Tadelis, 2007. "Contracting for Government Services: Theory and Evidence from U.S. Cities," NBER Working Papers 13350, National Bureau of Economic Research, Inc.
    41. Leon Yang Chu & David E. M. Sappington, 2007. "Simple Cost-Sharing Contracts," American Economic Review, American Economic Association, vol. 97(1), pages 419-428, March.
    42. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-138, March.
    43. Melumad, Nahum & Mookherjee, Dilip & Reichelstein, Stefan, 1992. "A theory of responsibility centers," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 445-484, December.
    44. repec:hal:cesptp:hal-00710639 is not listed on IDEAS
    45. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. 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.
    3. Lalive, Rafael & Schmutzler, Armin, 2011. "Auctions vs Negotiations in Public Procurement: Which Works Better?," CEPR Discussion Papers 8538, C.E.P.R. Discussion Papers.
    4. 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.
    5. repec:bla:jindec:v:65:y:2017:i:1:p:1-38 is not listed on IDEAS
    6. 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.
    7. repec:eee:juipol:v:48:y:2017:i:c:p:176-183 is not listed on IDEAS
    8. repec:eee:transa:v:111:y:2018:i:c:p:174-186 is not listed on IDEAS
    9. 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.
    10. 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.
    11. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.
    12. repec:eee:transa:v:107:y:2018:i:c:p:106-125 is not listed on IDEAS
    13. 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.
    14. 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.
    15. 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.
    16. repec:eee:transb:v:112:y:2018:i:c:p:40-72 is not listed on IDEAS

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we096742. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ana Poveda). General contact details of provider: http://www.eco.uc3m.es/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.