April 29, Transaction Costs, Public Private Partnerships

What is Transaction Cost Economics (TCE)?

A framework used to analyze the hidden costs in contracts, such as negotiating, monitoring, and enforcing agreements.

How does Whittington apply TCE?

By comparing infrastructure contracts (design-build vs. bid-build), focusing on production vs. transaction costs.

What are production costs in TCE?

Direct costs of building a project (e.g., labor, materials, equipment).

What are transaction costs in TCE?

Indirect costs like change orders, disputes, strategic bidding, and front-loading of payments.

What did Whittington find about design-build contracts?

They reduced change orders but increased upfront costs by $3.8 million, due to firms pricing in risk through strategic markups.

Are transaction costs eliminated in design-build contracts?

No—they are transformed and front-loaded, often hidden in inflated early-stage costs.

Example of strategic markup in design-build contracts

Firms charged far more for mobilization and grading than justified by project size, showing opportunism.

What is a Public-Private Partnership (PPP)?

A contractual arrangement where the private sector provides infrastructure or services that are traditionally public.

Why are PPPs used in the U.S.?

Due to limited transportation funding and aging infrastructure; PPPs offer alternative financing and delivery methods.

Examples of PPPs in transportation

Joint development of transit hubs, private operation of transit services, leasing toll roads (e.g., Chicago), and building toll lanes.

What is the ideological debate surrounding PPPs?

Tension between free-market/private ownership models vs. government control and public interest goals.

How does neoliberalism relate to PPPs?

Emphasizes privatization and market-based governance, often supporting PPPs at the expense of public-sector roles.

What is a major conflict in PPPs?

Misalignment between private sector’s profit motives and public sector’s goals like equity, access, and environmental outcomes.