IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

The Cost of Contract Renegotiation: Evidence from the Local Public Sector

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

The renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts. However, assessing the cost of such renegotiation 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 urban transport service contracts. 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 increase over time. We 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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.tse-fr.eu/sites/default/files/medias/doc/wp/io/10-190.pdf
File Function: Full text
Download Restriction: no

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 10-190.

as
in new window

Length:
Date of creation: 14 Sep 2010
Date of revision:
Handle: RePEc:tse:wpaper:23209
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. 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.
  2. Bester, Helmut & Strausz, Roland, 2003. "Contracting with Imperfect Commitment and Noisy Communication," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 2, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Rey, Patrick & Salanie, Bernard, 1996. "On the Value of Commitment with Asymmetric Information," Econometrica, Econometric Society, vol. 64(6), pages 1395-1414, November.
  4. Gagnepain, P. & Ivaldi, M., 1999. "Incentive Regulatory Policies: the Case of Public Transit Systems in France," Papers 99.515, Toulouse - GREMAQ.
  5. 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, 09.
  6. 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.
  7. Jerry A. Hausman & James M. Poterba, 1986. "Household Behavior and the Tax Reform Act of 1986," Working papers 437, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
  9. 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.
  10. 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.
  11. 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 128-38, March.
  12. 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.
  13. Dionne, G. & Doherty, N., 1991. "Adverse Selection, Commitment and Renegotiation : Extention to and Evidence From Insurance Markets," Cahiers de recherche 9134, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  14. 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.
  15. 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 103-31, April.
  16. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  17. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, December.
  18. 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.
  19. 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.
  20. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-37, Autumn.
  21. 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 2352-83, October.
  22. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  23. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  24. 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.
  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. Khalil, F., 1992. "Auditing Without Commitment," Working Papers 92-15, University of Washington, Department of Economics.
  27. repec:hal:cesptp:hal-00710639 is not listed on IDEAS
  28. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  29. 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, 03.
  30. 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.
  31. 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.
  32. Caillaud, Bernard & Guesnerie, Roger & Rey, Patrick, 1989. "Noisy observation in adverse selection models," CEPREMAP Working Papers (Couverture Orange) 8921, CEPREMAP.
  33. 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.
  34. 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.
  35. 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.
  36. Laffont, Jean-Jacques, 1996. "Industrial policy and politics," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 1-27.
  37. Harry F. Campbell, 1975. "Deadweight Loss and Commodity Taxation in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 8(3), pages 441-47, August.
  38. repec:adr:anecst:y:1994:i:34:p:02 is not listed on IDEAS
  39. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  40. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
  41. 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.
  42. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
  43. Richard Schmalensee, 1989. "Good Regulatory Regimes," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 417-436, Autumn.
  44. Helmut Bester & Roland Strausz, . "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
  45. David P. Baron, 1988. "Regulation and Legislative Choice," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 467-477, Autumn.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. The Cost of Contract Renegotiation: Evidence from the Local Public Sector (AER 2013) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:tse:wpaper:23209. 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: ()

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.