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Economic Efficiency and Political Capture in Public Service Contracts

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  • Philippe Gagnepain
  • Marc Ivaldi

Abstract

We consider contracts for public transport services between a public authority and a transport operator. We build a structural endogenous switching model where the contract choice results from the combined effects of the incentivization scheme aimed at monitoring the operator's efficiency and the political agenda followed by the regulator to account for the voice of private interests. Our results support theoretical predictions as they suggest that cost-plus contracts entail a higher cost for society than fixed-price contracts but allow the public authority to leave a rent to a subset of individuals. Accounting for transfers to interest groups in welfare computations reduces the welfare gap between cost-plus and fixed-price regimes.
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Suggested Citation

  • Philippe Gagnepain & Marc Ivaldi, 2017. "Economic Efficiency and Political Capture in Public Service Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 65(1), pages 1-38, March.
    • Handle: RePEc:bla:jindec:v:65:y:2017:i:1:p:1-38
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    File URL: http://hdl.handle.net/10.1111/joie.12118
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    Cited by:

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    2. Aguiar, Luis & Gagnepain, Philippe, 2022. "Absorptive capacity, knowledge spillovers and incentive contracts," International Journal of Industrial Organization, Elsevier, vol. 82(C).
    3. Hörcher, Daniel & Tirachini, Alejandro, 2021. "A review of public transport economics," Economics of Transportation, Elsevier, vol. 25(C).
    4. An, Yonghong & Hong, Shengjie & Zhang, Daiqiang, 2023. "A structural analysis of simple contracts," Journal of Econometrics, Elsevier, vol. 236(2).
    5. Joanna Piechucka, 2021. "Cost efficiency and endogenous regulatory choices: evidence from the transport industry in France," Journal of Regulatory Economics, Springer, vol. 59(1), pages 25-46, February.
    6. Joanna Piechucka, 2020. "Cost Efficiency and Endogenous Regulatory Choices: Evidence from the Transport Industry in France," Discussion Papers of DIW Berlin 1851, DIW Berlin, German Institute for Economic Research.
    7. Ariane Charpin & Joanna Piechucka, 2020. "Merger Efficiency Gains: Evidence from a Large Transport Merger in France," Discussion Papers of DIW Berlin 1843, DIW Berlin, German Institute for Economic Research.
    8. Dementiev, Andrei, 2018. "Contracting out public transport services to vertical partnerships," Research in Transportation Economics, Elsevier, vol. 69(C), pages 126-134.

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