Do Laws and Contracts Economize on the Same Cost? Trade-offs Between Transparency and Flexibility in Public-Private Partnerships

Jun 11, 2023

  • Research question:

How does regulation specificity affect contractual governance in public-private partnerships?

  • What the literature said:

- Contracts and laws matter for transaction efficiency: transaction cost economics (Coase, 1937; Williamson, 1996) and property rights theory (Alchian & Demsetz, 1972; Coase, 1960)

- PPP transactions are exposed to two significant hazards: governmental opportunism (Rangan, Samii, & Van Wassenhove, 2006; Levy & Spiller, 1994) and maladaptation risks (Bruce, de Figueiredo, & Silverman, 2019; Moszoro, Spiller, & Stolorz, 2016)

  • Central argument:

There is a sequential economizing process: law first mitigates costs that are outside the control of contracts (i.e., governmental opportunism), then contracts align the governance with the remaining costs (i.e., maladaptation risks).

  • Findings:

- PPP-specific law, which is expected to enhance transparency and mitigate governmental opportunism, reduces the likelihood of a user-pay contract (as opposed to government-pay). That is, private investors in a project are less likely to take the residual returns of a project when a detailed legal framework is in place.

- The relationship between PPP laws and PPP contracts is contingent on the partnership expertise of public sectors, the accumulated experience of private investors, and the political environment.

  • Context & Data:

An original database containing 4,637 infrastructure projects across 82 countries and eight sectors from 1997 to 2017