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Contractual flexibility or rigidity for public private partnerships? Theory and evidence from infrastructure concession contracts

  • Athias, Laure
  • Saussier, Stéphane

In this article, we explore the contractual design of toll infrastructure concession contracts. We highlight the fact that the contracting parties try to sign not only complete rigid contracts in order to avoid renegotiations but also flexible contracts in order to adapt contractual framework to unanticipated contingencies and to create incentives for cooperative behavior. This gives rise to multiple toll adjustment provisions and to a tradeoff between rigid and flexible contracts. Such tradeoff is formalized with an incomplete contract framework, including ex post maladaptation and renegotiation costs. Our model highlights the fact that trade-offs are complex and do not correspond to previous propositions coming from a transaction cost framework. More precisely, those previous works argue that a rigid contract is to be preferred as soon as specific assets are high. We highlight the fact that this proposition may be true, but only if other conditions concerning maladaptation costs, renegotiation costs and the probability to see the contract enforced are met. Furthermore, our results stress the fact that the institutional environment in which the contract is embedded matters. Propositions are tested using an original database of 71 concession contracts. Our results suggest an important role for economic efficiency concerns, as well as politics, in designing toll road concession contracts. In this perspective, our work complements other empirical studies on contractual price provisions (Masten-Crocker 1991, Crocker-Reynolds 1993, Bajari-Tadelis 2001, Bajari & al 2006), by considering the case of public-private contracting, as well as other studies on public-private partnerships, by focusing on toll adjustment provisions and documenting the effect of reputation and political ideology.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10541.

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Date of creation: 13 May 2007
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Handle: RePEc:pra:mprapa:10541
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  1. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 55-73, September.
  2. Oliver Hart, 2002. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," The Centre for Market and Public Organisation 02/061, Department of Economics, University of Bristol, UK.
  3. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2006. "Renegotiation without Holdup: Anticipating Spending and Infrastructure Concessions," Cowles Foundation Discussion Papers 1567, Cowles Foundation for Research in Economics, Yale University.
  4. Scott E. Masten & Stéphane Saussier, 2000. "Econometrics of Contracts : an Assessment of Developments in the Empirical Literature on Contracting," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 215-236.
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  8. Steven Tadelis, 2009. "Auctions Versus Negotiations in Procurement: An Empirical Analysis," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(2), pages 372-399, October.
  9. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1997. "Highway Franchising: Pitfalls and Opportunities," Documentos de Trabajo 15, Centro de Economía Aplicada, Universidad de Chile.
  10. Nicola Doni, 2006. "The Importance Of Reputation In Awarding Public Contracts," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 401-429, December.
  11. Abhijit V. Banerjee & Esther Duflo, 2000. "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 989-1017.
  12. Crocker, Keith J & Masten, Scott E, 1991. "Pretia ex Machina? Prices and Process in Long-Term Contracts," Journal of Law and Economics, University of Chicago Press, vol. 34(1), pages 69-99, April.
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  17. 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.
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  19. Schmidt, Klaus M., 1996. "The costs and benefits of privatization: An incomplete contracts approach," Munich Reprints in Economics 19773, University of Munich, Department of Economics.
  20. Saussier, Stephane, 2000. "Transaction costs and contractual incompleteness: the case of Electricite de France," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 189-206, June.
  21. Goldberg, Victor P & Erickson, John R, 1987. "Quantity and Price Adjustment in Long-term Contracts: A Case Study of Petroleum Coke," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 369-98, October.
  22. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2006. "Privatizing Highways in the United States," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 27-53, September.
  23. Laure Athias & Stéphane Saussier, 2007. "Un partenariat public-privé rigide ou flexible ?. Théorie et application aux concessions routières à péage," Revue économique, Presses de Sciences-Po, vol. 58(3), pages 565-576.
  24. Antonio Estache, 2006. "PPI Partnerships vs. PPI Divorces in LDCs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 3-26, September.
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  26. J. Luis Guasch, 2004. "Granting and Renegotiating Infrastructure Concessions : Doing it Right," World Bank Publications, The World Bank, number 15024, November.
  27. David Martimort & Stephane Straub, 2006. "Privatization and Changes in Corruption Patterns: The Roots of Public Discontent," ESE Discussion Papers 147, Edinburgh School of Economics, University of Edinburgh.
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