Working Paper: NBER ID: w14152
Authors: Pablo T. Spiller; Jeffrey A. Jacobs
Abstract: The fundamental feature of private contracting is its relational nature. When faced with unforeseen or unexpected circumstances, private parties, as long as the relation remains worthwhile, adjust their required performance without the need for costly renegotiation or formal recontracting. Public contracting, on the other hand, seems to be characterized by formalized, standardized, bureaucratic, rigid procedures. Common wisdom sees public contracts as generally more inflexible, requiring more frequent formal renegotiation, having a higher tendency to litigate, and providing weaker incentives. In sum, public contracts are perceived to be less "efficient." In this paper I develop a theory of public contracting that accommodates these stark differences between private and public contracting. The thrust of the paper is that these differences arise directly because of the different hazards present in public and purely private contracts, which directly impact the nature of the resulting contractual forms. A fundamental corollary of this result is that the perceived inefficiency of public or governmental contracting is simply the result of contractual adaptation to different inherent hazards, and as such is not directly remediable. Finally, I apply the main insights from the general framework developed here to understand the characteristics of concession contracts.
Keywords: public contracts; private contracts; governmental opportunism; third-party opportunism; contractual efficiency
JEL Codes: H11; L14; L32; L33; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of contracting (public vs. private) (L33) | efficiency and adaptability of the contracts (J41) |
| governmental opportunism (H10) | formalization and rigidity of public contracts (L33) |
| third-party opportunism (D72) | formalization and rigidity of public contracts (L33) |
| formalization and rigidity of public contracts (L33) | inefficiency of public contracts (H57) |
| risks of governmental opportunism (D72) | formalization and rigidity of public contracts (L33) |
| risks of third-party opportunism (L14) | formalization and rigidity of public contracts (L33) |