More Detailed Laws Can Protect Investors — But Change Which Deals Get Done

When governments want private investors to finance infrastructure, detailed laws can look reassuring. Clear rules constrain arbitrary government action, strengthen commitments, and reduce uncertainty.

But legal protection can come with a cost: rigidity.

In “Disentangling contract and law: Legal specificity and contractual governance in public–private partnerships,” published in Strategic Management Journal in 2026, Mohammad Hosseini and Bertrand V. Quelin examine how the level of detail in public–private partnership laws affects the kinds of contracts governments and investors use. Their evidence shows that more specific legal regimes can strengthen credibility while making market-responsive arrangements less attractive.

The Research

The authors analyze 3,986 public–private partnership projects across 53 countries from 1997 through 2021. They focus on a central PPP design choice: who bears demand risk.

In government-pay projects, the state typically pays the private partner based on availability or service standards. Revenue is therefore largely insulated from how many users actually use the infrastructure.

In user-pay projects, by contrast, private investors earn revenue directly from users through tolls, tariffs, or fees. The private party bears more demand risk and may need greater flexibility to respond to changes in user demand, technology, costs, or operating conditions.

The researchers measure legal specificity through the number of provisions in each country’s PPP law and examine how that detail relates to payment structure and political institutions.

Legal Detail Solves One Governance Problem

Long-term infrastructure projects expose investors to the risk that a government will later change rules, alter terms, or exercise authority in ways that undermine the original deal. Specific PPP laws can reduce that risk by putting more constraints around government discretion.

The study finds that countries with weaker political constraints on governmental authority tend to adopt more detailed PPP laws. The authors interpret this as a compensatory mechanism: where broader institutional checks and balances are weaker, legal detail can substitute by creating clearer limits and procedures.

For private investors, that specificity can make government commitments more credible.

But Specificity Also Raises Adaptation Costs

The problem is that infrastructure projects are long-lived. Conditions change, and contracts sometimes need to adjust.

Highly specific laws can require more formal procedures, approvals, or politically visible renegotiations when tariffs, service terms, or operating arrangements need to change. Those constraints may be especially costly in user-pay projects, where the private partner’s revenue depends on actual market demand.

The same legal detail that protects the investor from opportunistic government action can therefore reduce the investor’s ability to respond efficiently to changing conditions.

More Specific Laws Were Associated With Fewer User-Pay Projects

The empirical results support that trade-off. In countries with highly specific PPP laws, projects were less likely to use user-pay contracts.

Where PPP laws were less specific, enactment of PPP legislation was associated with greater use of user-pay arrangements. Greater legal flexibility appears to make it easier for private partners to accept demand risk because they have more room to adapt operations and terms as market conditions evolve.

The key point is not that detailed laws are “bad.” They solve a different problem. Specificity strengthens protection against government discretion, but it changes which contractual structures remain attractive once that protection is in place.

Law and Contract Are Interdependent

A major contribution of the paper is its argument that legal and contractual governance should not be viewed as separate safeguards that simply add up.

The legal environment first shapes the risks that contracts must manage. If the legal framework is highly specific, it may reduce political opportunism but increase maladaptation costs. The contract then needs to be designed around that remaining risk profile.

This explains why identical payment structures may not be equally attractive across countries. The same user-pay arrangement that works in a flexible legal regime may become far less viable where every adaptation is tightly prescribed.

What Governments and Investors Should Do Differently

The Takeaway

Good governance is not simply about writing more rules or fewer rules. Hosseini and Quelin’s research shows that legal specificity solves one problem while potentially creating another.

Detailed laws can make government commitments more credible, especially where political institutions offer weaker constraints. But by limiting adaptation, those laws can make user-funded infrastructure arrangements less attractive.

For policymakers and investors, the strategic question is therefore not, “How much protection can we put into the law?” It is, “How do we create enough protection to make investment credible without eliminating the flexibility required for the project to work?”