Doing It by the Book: Political Contestability and Public Contract Renegotiations

We present a public procurement model in which contractual flexibility and political tolerance for contractual deviations determine renegotiations. In the model, contractual flexibility allows for adaptation without formal renegotiation, while political tolerance for deviations decreases with political competition. We then compare renegotiation rates of procurement contracts in which the procurer is either a public administration or a private corporation. We find robust evidence consistent with the model predictions: public-to-private contracts are renegotiated more often than comparable private-to-private contracts, and that this pattern is more salient in politically contestable jurisdictions. The frequent renegotiation of public contracts results from their inherent rigidity and provides a relational quality of adaptability to contingencies in politically contestable environments. (JEL D23, D72, D73, D78, H57).