The Dark and Bright Sides of Renegotiation: An Application to Transport Concession Contracts

The Dark and Bright Sides of Renegotiation: An Application to Transport Concession Contracts
Julie de Brux (Chaire EPPP & Vinci)
Abstract: Renegotiations of public-private partnerships have recently been the subject of much attention. Economists regularly analyse them through the lens of ‘hold up’ theories. According to these models, renegotiations are a problem to be avoided: renegotiations become opportunistic because agents are self-interested, and they use renegotiation to seek rents.
As a result, renegotiating destroys social surplus. Even when renegotiations occur to fill in the blanks of the contracts, and implement investments that had not been contracted ex ante, they typically predict a process by which parties use renegotiations to maximise their short run individual benefit.
This paper sets out an alternative and new view. Through two case studies, we show that renegotiations may be cooperative, contrary to the conventional view. We find that when parties give an important value to their present and future bilateral relationships, they are prone to find solutions that are sustainable and profitable for both parties. Even acting according to their own self-interest, at the stage of renegotiation, parties try to maximise joint utility. In this way, they reinforce the durability of their relationship.
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