Association for Public Policy Analysis & Management

Williamson’s 1976 study of natural-monopoly franchise bidding launched extensive debate concerning the degree to which transaction-cost problems afflict government franchising. More recently, Spiller’s 2008 paper added in the picture the fact that public contracts are intrinsically different from private ones suggesting that contracts signed with municipalities are inherently inefficient compared to private contracts. He also suggests that this inefficiency should be related to political contestability at the municipal level: because of third party opportunism, municipalities (and private companies) are obliged to frame rigid / inefficient contracts leading to frequent renegotiations and inefficient public service. This might explain why some municipalities contracted out some of their public services and decided not to renew their contract and to revert back public services.

In this paper, we propose that municipalities vary in ability to discipline franchisees and in their ability to frame good contracts because of third party opportunism and that this heterogeneous ability affects franchise renewal patterns and the quasi-rents that franchisees extract. We study provision of municipal water services in France; a setting characterized by both direct public provision and franchised private providers. We collected data concerning the way water services are organized between 1998 and 2014. We observe more than 200 switches from private to public management. We also observe more than 200 switches from public to private during the same period. In addition, we collected information concerning municipal elections on this period (elections are organized every 6 years) and we constructed political contestability indicators.

This paper complements Chong & al 2014’s paper by extending the data set (Chong et al are looking only at the 1998-2008 period) and by adding political contestability issues in our analysis. (JEL: H0, H7, K00, L33)

References:

Chong E., Saussier S. and Silverman B. (2015), “Water under the Bridge: Cith Size, Bargaining Power, Price and Franchise Renewals in the Provision of Water”, Journal of Law, Economics and Organization, Volume 31, Number 1, 3-39.2015.

Spiller, Pablo T. 2008. « An institutional theory of public contracts: Regulatory implications ». NBER Working Paper (14152).

Williamson, Oliver E. 1976. « Franchise bidding for natural monopolies: In general and with respect to CATV ». Bell Journal of Economics 7(1): 73‑104.