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The Simple Micro-Economics of Public-Private Partnerships

39 Pages Posted: 20 Sep 2008 Last revised: 25 Feb 2014

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 1, 2008

Abstract

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 fi rm chooses non-contractible e fforts in cost reduction and quality improvement. We fi rst consider the eff ect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for di fferent 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 fi nanciers and the impact of private fi nance. 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 specifi cally the risk of regulatory opportunism, aff ects 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

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

Elisabetta Iossa (Contact Author)

University of Rome Tor Vergata ( email )

Via Columbia n.2
Rome, 00133
Italy

IEFE Bocconi University ( email )

Via Roentgen 1
Milan, Milan 20136
Italy

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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