Advances in New Institutional Analysis series
Edited by Claude Ménard and Michel Ghertman
Chapter 3: An Institutional Theory of Public Contracts: Regulatory Implications
Pablo T. Spiller INTRODUCTION The fundamental feature of private contracting is its relational nature.1 When faced with unforeseen or unexpected circumstances, private parties, as long as the relation remains worthwhile, adjust their required performance without the need for costly renegotiation or formal recontracting (Baker et al., 2001).2 Public contracting,3 on the other hand, seems to be characterized by formalized, standardized, bureaucratic, rigid procedures (Greenstein, 1993).4 Faced with unexpected circumstances, parties in a public contract may face, even when the relation remains worthwhile, the stark choice of litigation or performance. In fact, common wisdom sees public contracts as generally more inflexible, requiring more frequent formal renegotiation, having a higher tendency to litigate, and providing weaker incentives. In sum, public contracts are perceived to be less ‘efficient’. The main thrust of this chapter is twofold: first, just as in private contracting, the nature of contracting hazards is what determines the fundamental features of public contracting (Williamson, 1979). A fundamental difference between private and public contracts is that public contracts are in the public sphere, and thus, although politics is normally not necessary to understand private contracting,5 it becomes fundamental to understanding public contracting. Second, the analysis of public contracting must be done within the proper institutional comparison (Coase, 1964) and with a heavy micro-analytic dose (Williamson, 1979). In fact, the supposed inefficiency of public contracting must be assessed in reference to all relevant alternatives (Williamson, 1996). In this chapter I develop a theory of public contracting that accommodates...
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