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

51 Pages Posted: 22 Nov 2010

See all articles by Philippe Gagnepain

Philippe Gagnepain

Universidad Carlos III de Madrid - Department of Economics

Marc Ivaldi

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 2010

Abstract

The renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts. However, assessing the cost of such renegotiation remains an open issue from an empirical viewpoint. To address this question, we fit a structural principal-agent model with renegotiation on a set of urban transport service contracts. The model captures two important features of the industry. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies increase over time. We compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators.

Keywords: Contract, Public transit, Renegotiation

JEL Classification: D86, L51

Suggested Citation

Gagnepain, Philippe and Ivaldi, Marc and Martimort, David, The Cost of Contract Renegotiation: Evidence from the Local Public Sector (October 2010). CEPR Discussion Paper No. DP8042. Available at SSRN: https://ssrn.com/abstract=1711055

Philippe Gagnepain (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 5732 (Phone)

Marc Ivaldi

Toulouse School of Economics ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 61 12 8592 (Phone)
+33 5 61 12 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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