Stéphane Saussier

Transaction costs and contractual incompleteness: the case of Electricite de France

Abstract This paper explores the incompleteness of inter-firm contracts through the lens of recent developments in transaction cost economics. We built a non-truncated contract database representing all the relationships of Electricite de France (EDF) with its coal-carriers over the period 1977–1997. We tested and corroborated most propositions derived from transaction cost theory relating contractual incompleteness to transaction characteristics, even when we considered the complete set of the theory’s propositions by endogeneizing the asset specificity at stake in transactions. To our knowledge, this kind of test has never been conducted before.

Dual distribution and royalty rates in franchised chains: an empirical exploration using French data

Abstract Most empirical studies concerning franchise systems have dealt with the monetary contractual provisions, especially with the determinants of royalty rates. But the organizational design of franchised chains has received less attention and dual distribution is still a misunderstood phenomenon in economic theory. What determines the proportion of companyowned units or franchised units within a chain? How does the level of the royalty rate interplay with the extent of company ownership? This paper supports the idea that dual distribution enables to mitigate contractual hazards due to information asymmetry and incomplete contracting. Thus a chains efficiency should strongly depend on the correct balance between royalty rates and the extent of company ownership. The interdependence between these two strategic decisions is analyzed by using a panel data set of 745 French franchisors. Econometric tests show that brand name value has a positive impact both on royalty rates and the proportion of companyowned units. Moreover, we put forth evidence that royalties and company ownership are complementary variables for the organizational design of chains.

Contractual Flexibility or Rigidity for Public Private Partnerships? Theory and Evidence from Infrastructure Concession Contracts

In this article, we explore the contractual design of toll infrastructure concession contracts. We highlight the fact that the contracting parties try to sign not only complete rigid contracts in order to avoid renegotiations but also flexible contracts in order to adapt contractual framework to unanticipated contingencies and to create incentives for cooperative behavior. This gives rise to multiple toll adjustment provisions and to a tradeoff between rigid and flexible contracts. Such tradeoff is formalized with an incomplete contract framework, including ex post maladaptation and renegotiation costs. Our model highlights the fact that trade-offs are complex and do not correspond to previous propositions coming from a transaction cost framework. More precisely, those previous works argue that a rigid contract is to be preferred as soon as specific assets are high. We highlight the fact that this proposition may be true, but only if other conditions concerning maladaptation costs, renegotiation costs and the probability to see the contract enforced are met. Furthermore, our results stress the fact that the institutional environment in which the contract is embedded matters. Propositions are tested using an original database of 71 concession contracts. Our results suggest an important role for economic efficiency concerns, as well as politics, in designing toll road concession contracts. In this perspective, our work complements other empirical studies on contractual price provisions (Masten-Crocker 1991, Crocker-Reynolds 1993, Bajari-Tadelis 2001, Bajari & al 2006), by considering the case of public-private contracting, as well as other studies on public-private partnerships, by focusing on toll adjustment provisions and documenting the effect of reputation and political ideology.

Public-private partnerships and investments in innovation: the influence of the contractual arrangement

Public-private partnership (PPP) policy strategies emphasize the ability of PPPs to foster innovation. Evidence reported in literature supports less the inherent quality of PPPs for innovation and more the importance of contributing factors. The contractual agreement is the setting of these factors. In this context, an analytical model based on behavioural economics is presented, with boundary conditions reflecting various contractual configurations. The analysis indicates why, from a purely economic point of view, the private party in a PPP arrangement has an incentive to invest in low risk incremental innovations, which impact on, and positively effect, cost savings during construction and operation. It is also identified that further innovations are hampered by the ability to produce verifiable improvements correlated to performance. Findings contribute to the subject of public procurement for innovation in PPPs and support public authorities regarding the rationale, potential and necessary framework conditions for the use of public procurement as an innovation policy tool.

Putting all one's eggs in one basket : relational contracts and the provision of local public services

Legal frameworks, especially in Europe, encourage private participation and competition in the management of public services. However, many local public authorities concentrate the various services they have in charge in the hands of a single operator, leading to horizontal integration which a priori minimizes the positive effects of competition. The following article tries to understand why vertical disintegration is regularly combined with horizontal integration. Results of our model show that under some conditions, this may lead to better performance at lower cost for the public authority. Such a proposition is tested and corroborated using an original database concerning the contractual choices made by 5000 French local public authorities in 1998 and 2001.

Payment Schemes in Technology Licensing Agreements: A Transaction Cost Approach

This article provides an empirical assessment of payment schemes implemented in technology licensing agreements. We propose that differences in payment schemes reflect the ex ante measurement costs and the ex post contractual hazards existing in such agreements. We argue that such costs evolve with the quality of the protection provided to the licensor by the institutional environment and with the nature of what is exchanged. In order to test this, we use a new source of data (a French governmental database designed to observe international technology transfers) and we analyze the choice of royalties vs. lump sum payments. While we observe no clear effect of institutional environment on the way payment schemes are implemented, our empirical investigations highlight the key role played by the tacitness of the licensed knowledge. Our results suggest that collecting precise data as we did measuring what is exchanged might shed new lights on previous studies focusing only on sector differences. Furthermore, our results also show that in the case of technology transfers, because ex post contractual hazard appear to be particularly acute (i.e. termination is of no concern to the licensee once he has absorbed the relevant knowledge since such transfer is non-reversible), results in previous studies on other classes of transaction are not confirmed. This suggests that different payment scheme strategies should be retained depending on what is actually exchanged by contracting parties.

Contracting with Governments

In this paper we review contracting issues raised by a government’s decision to contract out activities linked to public services, as well as highlighting potential future research avenues. We first review the different kinds of contracting arrangements and public private partnerships used by government to contract out their activities. In Section 1, we highlight the difficulties linked to the specificities of the arrangements between the government, considered a competent and benevolent dictator, due to complex information and commitment issues. We focus on the different sources of contractual failures resulting from contractual incompleteness and from imperfect competition among the potential private providers of public services. We then focus on the specificities of the relationship between the private and public parties that might be non-benevolent and therefore submitted to specific constraints to control potential disfunctioning like corruption, (see Section 2). Lastly we consider the “government” no longer as an homogeneous entity, but as a complex, multi-purpose organization submitting third parties to specific hazards (Section 3). Suggestions for further research follow in the conclusion.

Organizing Prisons through Public-Private Partnerships: a Cross- Country Investigation

In this paper, we analyze the private participation in prison services in three countries: Brazil, France, and the United States. We highlight striking differences in efficiency between these countries and argue that the explanation for these differences is not restricted to the way property rights are distributed (i.e.public vs. private management). Instead, our analysis suggests that understanding those differences also requires an analysis of the incentives provided by contractual choices as well as decision and revenue rights distribution and institutional constraints. The theoretical literature usually analyzes these blocks separately, and often focuses on property rights distribution. We argue that an efficient arrangement is the result of the way these elements are combined, giving rise to a distinctive governance structure.

The Law of Small Numbers: Investigating the Benefits of Restricted Auctions for Public Procurement

ABSTRACT A commonly accepted view in the academic literature is that dispensing with competition may only be beneficial when tendering complex contracts. However, restricted auctions are frequently used among EU member states to procure small contracts. In this article, we investigate this paradox. Using an original data set of 180 contracts used by a local public buyer of social housing between 2006 and 2009, we show that limiting competition may enable economies to be made on transaction costs while the most efficient bidders still come forward, and that abuses such as corruption or favouritism do not result. To our knowledge, this article is the first to shed light on the advantages of using restricted auctions when tendering small simple contracts.

Monitoring policy and organizational form in franchised chains

Abstract Franchising is nowadays a prominent way to organize the distribution sector. While previous literature suggests that monitoring issues are a critical determinant of organizational choices, it is rather silent on the optimal monitoring strategy once the organization of the chain is set. In this article, we analyze the monitoring policy of chains with both franchised and company-owned units. We develop a model in which a chain monitors its outlets under asymmetric information on local demands and managers’ efforts. We show that partial monitoring (i.e., when the franchisor monitors only a subset of its outlets) represents an optimal monitoring policy. Second, we identify the units that should be monitored. Finally, we discuss the impact of information technologies and outlet location on monitoring policy and how it may affect the proportion of franchised and company-owned units within the mixed chains.