Opportunism and third-party influence on long-term public contracts

Abstract

This article illustrates the influence of interest groups on government and concessionaire contractual behavior in long-term public contracts. We show that government political commitments with stakeholders may represent a ‘reputational investment’, which reduces the incentives to enforce the contract and increases the willingness to accept renegotiation proposals. When observed by the concessionaire, particularly concerning ‘politically sensitive’ projects, this situation can be exploited to capture additional quasi-rents from the exchange relationship. Using a simple model and a case study, we show that the interactions of parties with influential stakeholders, in the context of weak institutions, can create favorable conditions for opportunistic behavior.