The Simple Micro-Economics of Public-Private Partnerships
University of Rome Tor Vergata; University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)
University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)
December 1, 2008
CEIS Working Paper No. 139
We build on the existing literature in Public Private Partnerships (PPP) to analyze the main incentive issues in PPPs and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multi-task environment in which a risk averse firm chooses non-contractible efforts in cost reduction and quality improvement. We first consider the effect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for different assumptions on feasible contracts and information available to the government. Then we extend the model in novel directions. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in PPP agreements and the dynamics of PPPs, including cost overruns. We also consider how institutions, and specifically the risk of regulatory opportunism, affects contract design and incentives. The conclusion summarizes policy implications on the desirability of PPPs.
Number of Pages in PDF File: 39
Keywords: Public-private partnerships, public-service provision
JEL Classification: D8, L5, H54, H57
Date posted: September 20, 2008 ; Last revised: February 25, 2014
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