Corruption in PPPs, Incentives and Contract Incompleteness

43 Pages Posted: 18 Jul 2014

See all articles by Elisabetta Iossa

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University; Centre for Economic Policy Research (CEPR)

David Martimort

Paris School of Economics (PSE)

Multiple version iconThere are 3 versions of this paper

Date Written: April 7, 2014

Abstract

In a public procurement setting, we discuss the desirability of completing contracts with state-contingent clauses providing for monetary compensations to the contractor when revenue shocks occur. Realized shocks are private information of the contractor and this creates agency costs of delegated service provision. Verifying the contractor’s messages on the shocks entails contracting costs that make incomplete contracts attractive, despite their higher agency costs. A public official (supervisor) has private information on contracting costs and chooses the degree of contractual incompleteness on behalf of an upper-tier public authority. As the public official may be biased towards the contractor, delegating the contractual choice to that lower-tier may result in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contract terms are discussed.

Keywords: Corruption, Incomplete Contracts, Moral Hazard, Principal-Agent- Supervisor Model, Public-Private Partnerships, Risk Allocation

JEL Classification: D23, D82, K42, L33

Suggested Citation

Iossa, Elisabetta and Martimort, David, Corruption in PPPs, Incentives and Contract Incompleteness (April 7, 2014). CEIS Working Paper No. 317, Available at SSRN: https://ssrn.com/abstract=2468101 or http://dx.doi.org/10.2139/ssrn.2468101

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

David Martimort

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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