Soft Budgets and Renegotiations in Public-Private Partnerships

35 Pages Posted: 25 Aug 2009

See all articles by Eduardo M. R. A. Engel

Eduardo M. R. A. Engel

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA)

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2009

Abstract

Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear.

Keywords: build-operate-and-transfer, concessions, lowballing

JEL Classification: H21, L51, L91

Suggested Citation

Engel, Eduardo M. and Fischer, Ronald D. and Galetovic, Alexander, Soft Budgets and Renegotiations in Public-Private Partnerships (August 24, 2009). Cowles Foundation Discussion Paper No. 1723. Available at SSRN: https://ssrn.com/abstract=1460688 or http://dx.doi.org/10.2139/ssrn.1460688

Eduardo M. Engel (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
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203-432-5595 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA) ( email )

Republica 701
Casilla 2777
Santiago
Chile
+56/2/678 4055 (Phone)
+56/2/689 7895 (Fax)

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

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