Public-Private Partnerships versus Traditional Procurement: Innovation Incentives and Information Gathering

Abstract

A government agency wants a facility to be built and managed to provide a public service. Two different modes of provision are considered. In a public-private partnership, the tasks of building and managing are bundled, while under traditional procurement, these tasks are delegated to separate private contractors. The two modes differ in their incentives to innovate and to gather private information about future costs to adapt the service provision to changing circumstances. Depending on the potential benefits of such adaptations, the government agency's preferred mode of provision may be different from the one that should be chosen from a welfare perspective.

Keywords: Incomplete contracts, Information gathering, Integration versus separation, Public-private partnerships

JEL Classification: D86, H11, L33