Working Paper: CEPR ID: DP8042
Authors: Philippe Gagnepain; Marc Ivaldi; David Martimort
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.
Keywords: contract; public transit; renegotiation
JEL Codes: D86; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| renegotiation (C78) | welfare losses (D69) |
| full commitment (Y20) | welfare gains (D69) |
| increasing subsidies (H23) | inefficient outcomes (D61) |