Corruption, Contract Renegotiation and Cost Increases: Insights from the Odebrecht Scandal

The construction sector is notorious for its vulnerability to corruption, largely due to lax regulations, procedural discretion, and bureaucratic legislation. One of the most pervasive mechanisms through which corruption materializes is contract renegotiation. Although formally justified by unforeseen contingencies, renegotiations are frequently used to inflate costs and deadlines in ways that facilitate bribery and embezzlement. The Odebrecht scandal, revealing USD 788 million in transnational bribes, provides a critical case for examining how corruption and renegotiation intersect in large-scale infrastructure projects across Latin America. This study provides a theoretical and empirical analysis of the relationship between corruption and contract renegotiation in construction projects. It explains how firms such as Odebrecht strategically target countries with weak regulatory frameworks, limited judicial effectiveness, and ease of political access, where renegotiation becomes a central mechanism for rent extraction. Empirically, the likelihood of renegotiation is estimated using a logit model, while cost overruns are analyzed through a Tobit specification. The results show that corruption increases the probability of renegotiation by 26.1 percent and raises post-renegotiation costs by an average of USD 68 million (36.8 percent above the mean). Although public–private partnerships are associated with a 19.5 percent lower likelihood of renegotiation after controlling for corruption, they do not significantly reduce cost overruns. By linking corruption and renegotiation, the study offers new insights into rent-seeking behavior in the construction sector.