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

Philippe Gagnepain, Marc Ivaldi, and David Martimort


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.

JEL codes

  • D86: Economics of Contract: Theory
  • L51: Economics of Regulation

Published in

American Economic Review, vol. 103, n. 6, October 2013, pp. 2352–2383