Philippe GAGNEPAIN (Universidad Carlos III de Madrid)
The Cost of Contract Renegotiation: Evidence from the Local Public Sector.
Abstract: The renegotiation of regulatory contracts prevents regulators from achieving the full commitment efficient outcome. Assessing the cost of 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, the local authorities use only two types of contract. Second, the subsidies increase over time. We compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from commitment are significant and accrue mostly to operators.
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