An institutional theory of public contracts: regulatory implications
National Bureau of Economic Research, 2008 - Law - 31 pages
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.
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adapting to shocks agencies Aguas del Aconquija Argentina Atlanta bureaucracy challenge concession contracts contract adaptation contract termination contractor costs credibility Defense Department of Defense domain name example fact fundamental feature governmental opportunism requires Guasch high power incentives implement implications increase incumbent public agent inefficiency of public institutional environment interest groups interested third parties investments investors judicial independence Levy and Spiller limit the potential limits to governmental low power incentives McCubbins and Schwartz million/year nature NBER open access operating opportunistic behavior paper payment PDVSA perceived inefficiency political competitor potential for governmental potential for third price cap private party probity procurement public contracting public incumbent public scrutiny purely private contracts rate-of-return regulation regulation by contract regulatory contracts regulatory framework relation remains worthwhile relational contracting rigid procedures risk of governmental risk of third subscriptions third party opportunism threat of governmental types of hazards United Water Venezuela vertical integration waterworks Williamson 1999 Williamson 2002