Governance, Regulation and Innovation

Governance, Regulation and Innovation

Theory and Evidence from Firms and Nations

Edited by Mehmet Ugur

This book aims to disentangle the complex relationship between innovation and its potential determinants, paying special attention to the roles of governance and regulatory frameworks, and the ways in which the latter interact with other drivers of innovation such as competition and the innovator’s closeness to the technology frontier.

Chapter 9: Innovation and regulatory outcomes: evidence from the public-private contracts for water supply in France

Freddy Huet and Simon Porcher

Subjects: business and management, corporate governance, economics and finance, corporate governance, economics of innovation, industrial economics, institutional economics, innovation and technology, economics of innovation


Many scholars advocate that competition for the market can effectively substitute for competition on the market in network industries characterized by natural monopoly characteristics (Demsetz, 1968; Posner, 1972). However, the literature also emphasizes that a lot of potential pitfalls arise when public authorities implement auctions for the award of public-private partnership (PPP) contracts in monopolistic sectors (Crocker and Masten, 1996). One of the most important problems lies in the fact that it is difficult to replace the firm winning the very first auction at the end of the contract. The transaction cost literature (Williamson, 1976; Klein, 1998) suggests that when the incumbent is in charge with the realization of specific investments, a bilateral dependency arises between the firm and the public authority. The problem lies in the fact that the value of these assets would be lost if the firm is replaced. The existence of specific assets then creates a ‘lock-in’ situation that makes it difficult for the public authority to switch to another supplier. As a consequence, the incumbent enjoys a ‘first mover’ advantage over rivals at contract renewals (Williamson, 1975). Whether this advantage is due to opportunistic behaviour or reputational bonus remains an open question.

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