Political renegotiation of regulatory contracts

Cécile AUBERT () and Jean-Jacques Laffont

Game Theory and Information from EconWPA

Abstract: Governmental contracts may be renegotiated after political changes. Current governments can anticipate this and strategically distort contracts to influence renegotiation outcomes. In this sequential common agency game, the initial contract impacts elements of the renegotiation process: outside options (a `leverage' effect), and the beliefs of the new government through partial information revelation (a `strategic' effect). We characterize the optimal initial contract, as a function of political stability, time preference, and profits appropriation by the initial government. It always entails either full separation or strategic, partial, information revelation. Last, institutional rules imposing immediate payments to the firm help limit output distortions.

Keywords: Renegotiation; Political uncertainty; Regulation. (search for similar items in EconPapers)
JEL-codes: D82 L51 D73 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic, nep-pol and nep-reg
Date: Written
Note: Type of Document - pdf; pages: 46
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpga:0506002

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