Contracting with the Government : Incomplete contracting and contract renegotiation

Renegotiation is a central feature of long-term public-private contracts, particularly in infrastructure and service provision. In practice, such contracts are almost never executed as originally signed. Substantial amendments—on price, duration, investments, or service quality—are the norm rather than the exception. Empirical studies, such as Guasch (2004), document that over half of concession contracts undergo renegotiation within two years of signature, raising concerns about the credibility and stability of the contractual framework.

These renegotiations stem from both strategic behavior and genuine adaptation needs. Opportunistic motives include public authorities using initial low bids to make projects politically acceptable or private firms underbidding with the expectation of future adjustments. On the other hand, unforeseeable contingencies—like acts of vandalism in the Paris Vélib’ scheme—may necessitate revision to ensure service continuity and economic viability.

This duality makes it difficult to clearly distinguish between efficient adaptation and opportunism. As a result, contract design faces a key trade-off: ensure enough rigidity to preserve incentives and selection credibility, while allowing flexibility to adapt to future states of the world. Effective governance structures, including predefined renegotiation procedures and clear institutional rules, are essential. Transparency is also vital, as renegotiation often occurs between a limited number of actors despite public interest implications. Ultimately, well-crafted contractual and institutional frameworks are necessary to reconcile flexibility with accountability in public-private contracting.

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