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The cost of contract renegotiation: Evidence from the local public sector

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  • Philippe Gagnepain

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Marc Ivaldi

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

  • David Martimort

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

Economic theory claims that contracts renegotiation prevents from reaching the informationally constrained efficient solution that could have been obtained under full commitment. Assessing the cost of renegotiation compared to the full commitment scenario still remains an open issue from an empirical viewpoint. To address this question, 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. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies are greater when a cost-plus contract was signed earlier on than following a fixed-price contract. We then compare a scenario with renegotiation and a hypothetical situation with full commitment. 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," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00710639, HAL.
    • Handle: RePEc:hal:cesptp:hal-00710639
    DOI: 10.1257/aer.103.6.2352
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    JEL classification:

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

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