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Renegotiation without Holdup: Anticipating Spending and Infrastructure Concessions

  • Eduardo Engel

    (Cowles Foundation, Yale University)

  • Ronald Fischer

    (University of Chile - Center of Applied Economics (CEA))

  • Alexander Galetovic

    (Universidad de los Andes)

Infrastructure concessions are frequently renegotiated after investments are sunk, resulting in better contractual terms for the franchise holders. This paper offers a political economy explanation for renegotiations that occur with no apparent holdup. We argue that they are used by political incumbents to anticipate infrastructure spending and thereby increase the probability of winning the upcoming election. Contract renegotiations allow administrations to replicate the effects of issuing debt. Yet debt issues are incorporated in the budget, must be approved by Congress and are therefore subject to the opposition's review. By contrast, under current accounting standards the obligations created by renegotiations circumvent the budgetary process in most countries. Hence, renegotiations allow incumbents to spend more without being subject to Congressional oversight.

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File URL: http://cowles.econ.yale.edu/P/cd/d15b/d1567.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1567.

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Length: 17 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:cwl:cwldpp:1567
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Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. J. Luis Guasch, 2004. "Granting and Renegotiating Infrastructure Concessions : Doing it Right," World Bank Publications, The World Bank, number 15024.
  2. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October.
  3. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stephane, 2003. "Renegotiation of concession contracts in Latin America," Policy Research Working Paper Series 3011, The World Bank.
  4. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
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