Infrastructure Contracts: Trust and Institutional Updating

Dassiou, X. & Stern, J. (2009). Infrastructure Contracts: Trust and Institutional Updating. Review of Industrial Organization, 35(1-2), pp. 171-216. doi: 10.1007/s11151-009-9221-4

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Abstract

This paper discusses trust and trust perceptions in infrastructure contracts and supporting institutions. We focus on perceptions of the trustworthiness of the government purchasers of infrastructure services by the supplying companies and by the governments themselves. In particular, we allow for trust updating and trust misalignments, which may give rise to ‘undertrusting’ and ‘overtrusting’. The core of the paper sets out a game theoretic model of contracts with dynamic adjustment of trust perceptions, which we use to explore the impact of trust misalignment both on economic efficiency (measured by expected welfare) and on investment levels. We explore flexible contracts with and without pre-payments, rigid contracts (which do not allow for post-investment renegotiation), and hybrid contracts. We then compare the efficiency of the flexible contracts to that of hybrid contracts using as a criterion the expected welfare implications of each contract. The model is used to shed light on current issues on the sustainability of private investment infrastructure contracts in developed and in developing countries, including the role of regulatory institutions.

Item Type: Article
Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1007/s11151-009-9221-4
Subjects: H Social Sciences > HB Economic Theory
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/7269

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