Manager identity, relational contracting and the design of public-private agreements
This study analyzes a comprehensive dataset of French parking contracts to demonstrate that agreements with private managers who have prior experience with public buyers tend to be less formalized, specifically featuring fewer penalty and monitoring clauses, thereby providing empirical evidence for a substitution effect between written and unwritten relational contracting.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of public services, from the water we drink to the roads we drive on, governments often hire private companies to do the work. This arrangement creates a delicate balance. On one side, there is the need for strict rules and detailed contracts to ensure the company does its job correctly and doesn't take advantage of the public. On the other side, there is the reality that no written document can predict every future problem or change in circumstance. When a contract is too rigid, it becomes difficult to adapt to new situations without expensive legal battles. When it is too loose, it leaves room for the company to cut corners. This tension leads to a fundamental question in economics: can trust between two parties replace the need for a thick, rule-bound contract? Specifically, does a long-standing relationship between a government and a company allow them to rely on unwritten understandings rather than pages of penalties and monitoring clauses?
This question is at the heart of a study by Vincent Jardine, which examines how the identity of the people running a private company changes the way public contracts are written. The research focuses on a specific corner of the economy: parking lots in France. Jardine analyzed hundreds of agreements signed between French cities and a single large operator responsible for building and managing these parking facilities. The study looks at two main types of deals. One type, known as standard public procurement, involves short-term agreements where the city pays the company to run the lot, and the city bears the risk if fewer people park there. The other type, called a public service delegation, is a long-term partnership, often lasting decades, where the company builds the lot and takes on the financial risk of how many cars actually show up. These long-term deals are more complex and allow for more flexibility in how the agreement is structured.
The researcher's central idea is that trust is built between people, not just between organizations. When a city signs a contract with a company, the specific managers who sign the deal matter. If the city has worked with the same managers before, they have a history of interaction. They know how those individuals think, how they value the relationship, and whether they can be relied upon to keep their word without a written rule forcing them to. However, if the company changes its leadership and a new, unknown manager steps in, that history is broken. The city no longer knows the person they are dealing with. Jardine hypothesized that this uncertainty would make the city nervous, leading them to demand a much more rigid contract filled with strict penalties and detailed monitoring requirements to protect themselves.
To test this, the researcher built a unique way to measure how "rigid" or strict a contract was. Instead of just counting the number of pages, the study used a method that looked for specific words related to punishment, delays, quality checks, and legal disputes. The analysis gave more weight to rare, specific terms that appeared in a contract, assuming that a contract filled with unique, strict clauses was more rigid than one with common, generic language. By comparing contracts signed with familiar managers against those signed with new ones, the study could see if the level of strictness changed.
The results showed a notable pattern. When a city signed a deal with a manager they had never met before, the resulting contract was indeed more rigid. Specifically, these new agreements were more likely to include detailed clauses about financial penalties if the company failed to meet standards, strict requirements for reporting on the condition of the parking infrastructure, and formal procedures for monitoring the company's daily activities. In contrast, when the city had worked with the same managers in the past, the contracts were more flexible, relying less on these heavy-handed written safeguards. This suggests that the city felt secure enough to trust the known managers to do the right thing without needing every possible outcome written down in advance. However, the author cautions that these findings should be regarded as robust correlations rather than definitive causal effects, as other factors could influence the results.
However, this effect was not the same for every type of contract. The study found that the shift toward rigidity when dealing with new managers happened primarily in the long-term, high-discretion deals known as public service delegations. These are the complex, multi-decade partnerships where the company has significant freedom to manage the project. In these cases, the relationship between the people matters most. For the shorter, standard procurement contracts, which are governed by very strict, automatic rules and offer little room for negotiation, the identity of the manager generally made no difference to the main rigidity measures. However, the study did note a specific exception: for these standard contracts, manager changes appeared to affect the inclusion of "adaptation clauses," which are designed to plan for future renegotiations, though this effect was only statistically significant at a lower confidence level. This distinction highlights that the ability to rely on trust and unwritten understandings depends heavily on having the freedom to choose who you work with and how you structure the deal.
The study also considered whether the political environment played a role. It was possible that in cities with high political competition or during election years, officials might be forced to write stricter contracts regardless of who the manager was, to avoid accusations of favoritism or corruption. The data did not support this idea. The level of political scrutiny or the timing of elections did not significantly change the relationship between manager identity and contract rigidity. The primary driver remained the personal history between the city and the specific managers on the other side of the table.
Ultimately, the research suggests that in the complex world of public-private partnerships, human relationships are a powerful economic force. When a government and a company have a history of working together with the same leadership, they can afford to write simpler, more adaptable contracts. This flexibility can save money and reduce the friction of constant legal oversight. But when that leadership changes, the safety net of trust disappears, and the system reverts to a more rigid, rule-bound approach to ensure safety. The findings imply that for public administrations, maintaining stable partnerships with companies that have consistent leadership could be a valuable strategy for reducing costs and improving efficiency, provided that the necessary legal frameworks allow for such flexibility. The study does not claim this is a perfect solution or that trust eliminates all risk, but it provides evidence that the people behind the signatures matter just as much as the words written on the page.
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