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American Economic Review Vol. 103 No. 6 2013

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

Philippe Gagnepain1; Marc Ivaldi2; David Martimort3

1 Paris School of Economics-Université Paris 1, 106-112 Boulevard de l'Hôpital, 75647 Paris Cedex 13, France. · 2 Toulouse School of Economics, 21 allée de Brienne, 31015 Toulouse Cedex 6, France. · 3 Paris School of Economics-EHESS, 48 boulevard Jourdan, 75014 Paris, France.

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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.

DOI
10.1257/aer.103.6.2352
Volume
103
Issue
6
Pages
2352-2383
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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