Contractual Flexibility or Rigidity for Public Private Partnerships? Theory and Evidence from Infrastructure Concession Contracts
46 Pages Posted: 1 Nov 2005 Last revised: 2 Oct 2008
Date Written: May 13, 2007
In this article, we explore the contractual design of toll infrastructure concession contracts. We highlight the fact that the contracting parties try to sign not only complete rigid contracts in order to avoid renegotiations but also flexible contracts in order to adapt contractual framework to unanticipated contingencies and to create incentives for cooperative behavior. This gives rise to multiple toll adjustment provisions and to a tradeoff between rigid and flexible contracts. Such tradeoff is formalized with an incomplete contract framework, including ex post maladaptation and renegotiation costs. Our results highlight the fact that trade-offs are complex and do not correspond to previous propositions coming from a transaction cost framework. More precisely, those previous works argue that a rigid contract is to be preferred as soon as specific assets are high. We highlight the fact that this proposition may be true, but only if other conditions concerning maladaptation costs, renegotiation costs and the probability to see the contract enforced are met. Furthermore, our results stress the fact that the institutional environment in which the contract is embedded matters. Propositions are then tested using an original database of 71 concession contracts. Our results suggest an important role for economic efficiency concerns, as well as politics, in designing toll road concession contracts. In this perspective, our work complements other empirical studies on contractual price provisions (Masten-Crocker 1991, Crocker-Reynolds 1993, Bajari-Tadelis 2001), by considering the case of public-private contracting, as well as other studies on public-private partnerships, by focusing on toll adjustment provisions and documenting the effect of reputation and political ideology.
Keywords: New Institutional Economics, Contractual design, concession contract, toll adjustment processes, incomplete contracting
JEL Classification: D23, H11, H54, L14, L24, L9
Suggested Citation: Suggested Citation