Designing contracts
The Indian govt would do well to read Jean Tirole on regulatory economics if policy renegotiations are to be minimised
The Indian government has often been pushed to renegotiate contracts in gas production, roads and airports. It would do well to read Jean Tirole on regulatory economics if episodes are to be minimized.
One of the problems is that contractors know more about their marginal costs than the regulator does. Information is asymmetric. Economist Tyler Cowen writes in his blog that monopolists who sign contracts have an incentive to report a delay, claim that costs have increased or ask for higher prices. A government is forced to the negotiating table, especially if no other contractor is ready to step in.
“The question then is: how should the contract best be designed in advance, so as to prevent this problem from popping up later on? Or should the renegotiation simply be allowed? Anyone wishing to tackle these questions likely would start with the papers of Tirole," says Cowen.
We can only agree.
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