Corruption in PPPs, Incentives and Contract Incompleteness

42 Pages Posted: 12 Nov 2015

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: November 2015

Abstract

We analyze risk allocation and contractual choices when public procurement is plagued with moral hazard, private information on exogenous shocks, and threat of corruption. Complete contracts entail state-contingent clauses that compensate the contractor for shocks unrelated to his own effort. By improving insurance, those contracts reduce the agency cost of moral hazard. When the contractor has private information on revenues shocks, verifying messages on shocks realizations is costly. Incomplete contracts do not specify state-contingent clauses, thereby saving on verifiability costs. This makes incomplete contracts attractive even though they entail greater agency costs. Because of private information on contracting costs, a public official may have discretion to choose whether to procure under a complete or an incomplete contract. When the public official is corrupt, such delegation results in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contracts 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 (November 2015). CEPR Discussion Paper No. DP10925, Available at SSRN: https://ssrn.com/abstract=2689147

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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