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Opportunism and hold-up in the incomplete public private partnership (PPP) contracts

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  • Chandan Kumar

    (Indira Gandhi Institute of Development Research)

Abstract

Opportunism is a concern for contracts that are incomplete in the presence of bounded rationality and uncertainty. Since Public Private Partnership (PPP) contracts are incomplete, are these contracts prone to opportunism? This paper attempts to find the answer to this question. It examines the contract design of the Indian PPP road contracts and analyzes its strengths and weaknesses to avoid the opportunism or hold-up using the probabilistic framework. This framework suggests that each type of contract should have its own self-enforcing range to make it incentive compatible. This paper compares the risk allocated in the two types of contracts (i.e. linked and delinked contracts) for delivering the project on time. Further, it empirically tests these findings using 82 PPP projects. The low probability of timely completion and longer time overruns in the delinked projects indicate the presence of possible opportunism. A further analysis of delinked contracts shows that the same set of companies (which have both types of contracts in their portfolio) could exploit the incorrectly specified delinked contract to create a hold-up like situation. In consonance with the contract theory, the analysis suggests that extra leverage should be given with more accountability and better checks.

Suggested Citation

  • Chandan Kumar, 2018. "Opportunism and hold-up in the incomplete public private partnership (PPP) contracts," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2018-012
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    References listed on IDEAS

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    1. Klein, Benjamin, 1980. "Transaction Cost Determinants of "Unfair" Contractual Arrangements," American Economic Review, American Economic Association, vol. 70(2), pages 356-362, May.
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    3. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216, Decembrie.
    4. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-463, July.
    5. Philippe Aghion & Mathias Dewatripont & Patrick Legros & Luigi Zingales, 2016. "The Impact of Incomplete Contracts on Economics," ULB Institutional Repository 2013/249190, ULB -- Universite Libre de Bruxelles.
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    More about this item

    Keywords

    Opportunism; Hold-up; Contracts; Public Private Partnership; India;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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