Franchising Public Services An Analysis of the Duration of Passenger Rail Franchises in Great Britain
for two decades, the procurement of public utilities has been engaged in a process of intensive reform. One type of organizational change that has been massively introduced is the use of franchise agreements for the provision of public services. This is the choice adopted by the reformers of the British railways, who decided to franchise the passenger rail service. But, whereas the theory on utilities restructuring recommends turning to long-term contracting, the British policy makers have chosen to rely on short-term franchise agreements.
Our objective in this paper is to examine the relevance of these contractual choices. Referring to Transaction Cost Economics, we investigate the determinants of franchise contracts duration. The results of our econometric tests show that the British reformers’ contractual choices are not consistent with the theoretical propositions. The new organizational mode of the British railways tends to increase the potential for opportunism and therefore the transaction costs.
KeywordsTransaction Cost Asset Specificity Rolling Stock Contract Duration Contractual Choice
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