The company you keep: Renegotiations and adverse selection in transportation infrastructure

Abstract

We study the effects of a country’s propensity to renegotiate transportation infrastructure contracts on the technical efficiency of the firms they attract. Firms are characterized by their ability to lobby and by their technical efficiency. In equilibrium, countries with a higher propensity to renegotiate contracts attract less efficient firms, that are better at renegotiating. This leads to costlier transportation infrastructure and lower welfare. Countries with institutional settings with a higher propensity for renegotiation, or where more net welfare is “up for grabs” in renegotiations, procure transportation infrastructure at a higher cost. We provide anecdotal evidence of the link between renegotiation in public procurement and a firm’s ability to renegotiate contracts.