The public sector hold-up problem: how structural asymmetries can undermine relationship-based service delivery

A recent wave of government contract cancellations under Termination for Convenience (TfC) clauses underscores the risks embedded in contemporary public contracting. These clauses, designed to preserve flexibility, have increasingly shifted from safeguards of last resort to instruments of routine discretion, exposing suppliers to sudden termination regardless of performance. We theorize this as the public sector hold-up problem, where relationship-specific investments that build collaborative capacity are vulnerable to unilateral state authority. Unlike private markets, where bilateral exposure and governance tools mitigate hold-ups, public contracting features structural asymmetries: (1) legal immunities insulating agencies, (2) political dynamics triggering unpredictable cancellations, and (3) constitutional constraints that preclude reciprocal safeguards. Extending hold-up theory into the public domain, this framework highlights how unchecked flexibility can undermine collaborative capacity essential for democratic governance.