Gagnepain, Philippe, Ivaldi, Marc and Martimort, David (2010) The Cost of Contract Renegotiation: Evidence from the Local Public Sector. TSE Working Paper, n. 10-190

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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.