39 Pages Posted: 20 Sep 2008 Last revised: 25 Feb 2014
Date Written: December 1, 2008
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.
Keywords: Public-private partnerships, public-service provision
JEL Classification: D8, L5, H54, H57
Suggested Citation: Suggested Citation
Iossa, Elisabetta and Martimort, David, The Simple Micro-Economics of Public-Private Partnerships (December 1, 2008). CEIS Working Paper No. 139. Available at SSRN: https://ssrn.com/abstract=1271082 or http://dx.doi.org/10.2139/ssrn.1271082
By Efraim Sadka