American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Cost of Contract Renegotiation: Evidence from the Local Public Sector
American Economic Review
vol. 103,
no. 6, October 2013
(pp. 2352–83)
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.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.103.6.2352Additional Materials
JEL Classification
- 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