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Renegotiating Incomplete Contracts: Over and Under-Investment in Public Infraestructure

Economic Analysis Review

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Title Renegotiating Incomplete Contracts: Over and Under-Investment in Public Infraestructure
Renegotiating Incomplete Contracts: Over and Under-Investment in Public Infraestructure
 
Creator Saavedra, Eduardo
 
Description This paper characterizes the equilibria of infrastructure franchising under incomplete contracting and ex–post renegotiation. The parties (government and a firm) are unable to credibly commit to the contracted investment plan, so that a second step investment (labeled as investments in service quality) is renegotiated by the parties in the revision stage. As expected, the possibility of renegotiation affects initial non-verifiable investments. The main conclusion of this paper is that not only under-investment but also over-investment in infrastructure may arise in equilibrium, compared to the complete contracting level.
This paper characterizes the equilibria of infrastructure franchising under incomplete contracting and ex–post renegotiation. The parties (government and a firm) are unable to credibly commit to the contracted investment plan, so that a second step investment (labeled as investments in service quality) is renegotiated by the parties in the revision stage. As expected, the possibility of renegotiation affects initial non-verifiable investments. The main conclusion of this paper is that not only under-investment but also over-investment in infrastructure may arise in equilibrium, compared to the complete contracting level.
 
Publisher Universidad Alberto Hurtado - Facultad de Economía y Negocios
 
Contributor —
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Date 2010-03-07
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier http://www.rae-ear.org/index.php/rae/article/view/125
 
Source Revista de Análisis Económico - Economic Analysis Review; Vol 13, No 1 (1998); 149-179
Revista de Análisis Económico – Economic Analysis Review; Vol 13, No 1 (1998); 149-179
0718-8870
0716-5927
 
Language eng
 
Relation http://www.rae-ear.org/index.php/rae/article/view/125/238