Political contestability and public contract rigidity: An analysis of procurement contracts

• Published date: 01 April 2019
• Date: 01 April 2019
• DOI: http://doi.org/10.1111/jems.12268
• Author: Marian W. Moszoro,Jean Beuve,Stéphane Saussier

316 © 2018 Wiley Periodicals, Inc. wileyonlinelibrary.com/journal/jems J Econ Manage Strat. 2019;28:316–335.

Received: 21 June 2017 Revised: 20 February 2018 Accepted: 31 May 2018

DOI: 10.1111/jems.12268

ORIGINAL ARTICLE

Political contestability and public contract rigidity: An analysis

of procurement contracts

Jean Beuve1Marian W. Moszoro2Stéphane Saussier3

1Department of Economics, Université Paris 1

Panthéon-Sorbonne, Paris, France

2George Mason University,Fairfax, Virginia

and WarsawSchool of Economics, Poland

3Department of Economics, IAE-Sorbonne

Business School, Paris, France

Correspondence

Marian W.Moszoro, Department of Eco-

nomics,George Mason University, 3434 Wash-

ingtonBlvd, Arlington, VA 22201, USA.

Email:mmoszoro@gmu.edu

Abstract

Are public contracts less adaptable than private contracts? Using a comprehensive

set of contracts for a standard product, we compare procurement contracts in which

the procurer is either a public administration or a private corporation. We find that

public-to-private contracts feature more rigidity clauses than private-to-private con-

tracts and that the use of rigidity clauses in public contracts rises when political risks

are more salient. We argue that a significant part of the increased rigidity of public

contracts is a contractual adaptation to limit political hazards from political opponents

and interested third parties.

KEYWORDS

contractual rigidity, political contestability, procurement

JEL CLASSIFICATION:

D23, D72, D73, D78, H57

1INTRODUCTION

Understanding public contracting is of utmost relevance for economists and policymakers: Public procurement accounts for

approximately 10% of GDP in the United States and 12% of GDP in OECD member countries.1Public contracting is the

government activity most vulnerable to waste and corruption, and its efficiency is a substantial component of voters' political

choices.

Prior studies have primarily assessed the efficiency of public contracting by focusing on the proper scope of governments

and whether contracting public services to the private sector is more efficient than direct public management. Despite several

explanations attributing transaction costs to the inefficiency of public contracting (Brown & Potoski, 2003), further explanations

for such inefficiencies haveremained obscure.2Little has been done, however, to examine the juxtaposition between the intrinsic

natures of public sector and private sector contracting. The prevailing view is that private sector contracts encapsulate most

contractual complexities (general case), whereas public sector contracts present special cases of issues rooted in social equity,

corruption, and “red tape.” That is, public sector and private sector contracts have been studied extensively in their separate

domains, but there exists no overarching theory that explains the idiosyncrasies of public vis-à-vis private contracts. This gap is

due, in part, to the difficulty in comparing contractual objects across public and private spheres.

We thank the participants in the presentations made at Columbia University (ALEA), University of California, Berkeley(Law & Economics), George Mason

University (Econ), Duke University(ISNIE), Sorbonne Business School (Chaire EPPP), Université Paris-Dauphine, Universitat Autònoma de Barcelona, Uni-

versidad de Chile (CEA), and the University of Bristol for their comments. Weare also par ticularlyindebted to Ken Ayotte, Lisa Bernstein, Nicholas Bloom,

John de Figueiredo, Rui de Figueiredo, Ronald Fischer, Robert Gibbons, Ricard Gil, Scott Masten,John Morgan, Kathr yn Plata, Eric Rasmusen, Pablo Spiller,

and Eric Talley for thorough comments and helpful suggestions.

BEUVE ET AL.3

317

A fundamental feature of public contracts is that they are subject to public oversight because they deal with public monies

(Spiller, 2008). As argued by Moszoro and Spiller (2018), public contracts are characterized by intrinsic differences stemming

from a substantial amount of supervision and control by political opponents and interest groups, who hold a stake in challeng-

ing and disrupting a contractual relationship. Consequently, unlike private contracting, a grasp on politics becomes vital in

understanding public contracting.

Public contracting is awarded through a set of rule-based (bureaucratic) procedures. This “contract rigidity” refers to the

addition of contractual specifications that impose ex post stringent enforcement, intolerance to adaptation, and penalties for

deviation.3From the public administration perspective, contractual rigidity minimizes the risk of politically motivated challenges

(Moszoro & Spiller, 2018). While from the contractor's perspective, contractual rigidity minimizes the risk of governmental

opportunism (Moszoro & Spiller, 2014), to include unfair administrative treatment and creeping expropriation.

Moreover,when faced with unexpected circumstances, private contractees tend to adapt ad hoc, while formalized amendments

are often found in public contracts. The rigidity of public contracts triggered by third-party opportunism also induces their

renegotiation through written amendments.

Building on the aforementioned characteristics of public contracting, two testable propositions can be derived. First, public

contracts are more rigid than equivalent transactions governed under private contracting. Second, public authorities subject to

political competition increase the proceduralization of contractual agreements to insulate themselves from politicallymotivated

challenges.

To test these propositions, we collected a unique set of contracts concerning parking lot agreements signed between 1985

and 2009 in France. We analyzed a large sample of contractual arrangements signed between a private operator and 24 private

procurers (which we call “private contracts”) and between the same private operator and 132 public authorities (which we call

“public contracts”) for which we were able to gather data on local elections.

Analogous to Schwartz and Watson(2012), we parsed through this rich sample of contracts using textual analysis. We find that

public contracts feature more rigidity clauses. We further compare the subsample of public contracts and find that the frequency

of rigidity clauses rises when political competition is tight. We argue that a significant part of the differences in contractual rigid-

ity among private and public contracts is a political risk adaptation to mitigate challenges from political contesters and interest

groups. Complementarily, where firms anticipate a politically unstable environment that may lead to creeping expropriation,

they will require rigid terms to minimize governmental opportunism.4

Our study contributes to contract theory and organizational economics by testing a novel set of propositions based on hazards

faced by public sector procurers. Organizations that are characterized by high degrees of “publicness” differ from “private”

organizations because they are more permeable to the political environment (Meier & O'Toole, 2011; Ring & Perry, 1985).

In this paper, we empirically test this permeability, focusing on the degree of contractual rigidity. The corollary is that the

perceived inefficiency of public contracting is mostly the result of contractual adaptation to different inherent hazards and thus

is not directly remediable (Williamson, 1999).

In most democracies, politicians face similar hazards in public procurement which—in addition to legal indictments in court—

refer foremost topolitical challenges that affect their reputation, career, and payoffs. Thus, our setup and results are generalizable

to jurisdictions with different legal systems (e.g., civil and common law). Wealso provide a replicable protocol to assess contract

rigidity in politically competitive jurisdictions.

The paper is organized as follows:In Section 2, we return to the specificities of public contracting and third-par ty opportunism

and derive propositions concerning rigidity and political contestability of public contracts. In Section 3, we present our data

and our empirical strategy to test our propositions. In Section 4, we show the results of our tests and robustness checks. In

Section 5, we utilize a natural experiment involvinga change in public procurement scrutiny to show the causal effect of political

contestability to contract rigidity. In Section 6, we discuss the results and limitations of our study. Section 7 concludes.

2THE SPECIFIC NATURE OF PUBLIC CONTRACTS

When contracting complex objectives (e.g., uncertain quality or unpredictable future events), the survival of a contract may be

at risk. One way to deal with contract complexity is to rely on informal commitments, that is, relational contracting (Macaulay,

1963).5To rely on relational contracts in the public domain is unfeasible. As Spiller (2008) points out, “when faced with unfore-

seen or unexpected circumstances, private contractees, as long as the relation remains worthwhile, adjust their required per-

formance without the need for costly renegotiation or formal re-contracting. Public contracting, on the other hand, seems to

be characterized by formalized, standardized, bureaucratic, rigid procedures.” Public contracting generates peculiar hazards

associated with one of the procurers being subject to public scrutiny to avoid corruption and graft.