Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase eﬀiciency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, ﬁrms lowball their oﬀers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are signiﬁcant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and ﬁnd that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear.
Engel, Eduardo; Fischer, Ronald; and Galetovic, Alexander, "Soft Budgets and Renegotiations in Public-Private Partnerships" (2009). Cowles Foundation Discussion Papers. 2042.