IESE Business School, Barcelona
Third-Party Opportunism, Scrutiny, and the (In)Efficiency of Public Contracts
Abstract :Public contracts feature higher specificity and rigidity than analogous pure private contracts. The lack of flexibility in ex ante design and ex post imple- mentation translates into contract inefficiencies and higher prices. However, specificity and rigidity are an efficient political risk adaptation by which public agents limit political hazards from third-party opportunism, externalizing the associated costs to the public at large. We present a comprehensible and testable theory of third-party opportunism and its effects on public contracts. We show that in the presence of opportunistic third parties there exists a Bayesian Nash equilibrium in which public contracts are more specific and rigid, and thus more expensive in their design, implementation, and control than the theoretical first- best in a non-opportunistic setup. We use case examples to extend the theory into practical settings and derive empirical implications. Finally, we extend the model to embrace governmental opportunism.