Work

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

Year: 2013

Type: article

Abstract: Contract theory claims that renegotiation prevents attainment of the efficient solution that could be obtained under full commitment. Assessing the cost of renegotiation remains an open issue from an empirical viewpoint. 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 as only two types of contracts are used (fixed price and cost-plus) and subsidies are greater following a cost-plus contract than following a fixed-price one. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators. (JEL D82, D86, L51, L92, R42, R48)

Source: American Economic Review

DOI: 10.1257/aer.103.6.2352

Authors: Philippe Gagnepain, Marc Ivaldi, David Martimort