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Political renegotiation of regulatory contracts

  • Cecile Aubert

    (Universite Paris Dauphine, Eurisco)

  • Jean- Jacques Laffont

    (IDEI, Toulouse)

Governmental contracts may be renegotiated after political changes. Current governments can anticipate this and strategically distort contracts to influence renegotiation outcomes. In this sequential common agency game, the initial contract impacts elements of the renegotiation process: outside options (a `leverage' effect), and the beliefs of the new government through partial information revelation (a `strategic' effect). We characterize the optimal initial contract, as a function of political stability, time preference, and profits appropriation by the initial government. It always entails either full separation or strategic, partial, information revelation. Last, institutional rules imposing immediate payments to the firm help limit output distortions.

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File URL: http://econwpa.repec.org/eps/game/papers/0506/0506002.pdf
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Paper provided by EconWPA in its series Game Theory and Information with number 0506002.

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Length: 46 pages
Date of creation: 15 Jun 2005
Date of revision:
Handle: RePEc:wpa:wuwpga:0506002
Note: Type of Document - pdf; pages: 46
Contact details of provider: Web page: http://econwpa.repec.org

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