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American Economic Review: Vol. 103 No. 6 (October 2013)

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

Article Citation

Gagnepain, Philippe, Marc Ivaldi, and David Martimort. 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector." American Economic Review, 103(6): 2352-83.

DOI: 10.1257/aer.103.6.2352

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.

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Authors

Gagnepain, Philippe (Paris School of Economics and U Paris I, Pantheon-Sorbonne)
Ivaldi, Marc (U Toulouse I Capitole)
Martimort, David (Paris School of Economics)

JEL Classifications

D82: Asymmetric and Private Information; Mechanism Design
D86: Economics of Contract: Theory
L51: Economics of Regulation
L92: Railroads and Other Surface Transportation
R42: Transportation Economics: Government and Private Investment Analysis; Road Maintenance, Transportation Planning
R48: Transportation Economics: Government Pricing and Policy


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