Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks

36 Pages Posted: 14 Feb 2023

See all articles by Marco Buso

Marco Buso

Catholic University of the Sacred Heart of Milan

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica

Michele Moretto

University of Padua, Dep of Economics and Management

Date Written: February 13, 2023

Abstract

In a continuous-time setting, we study the design of a dynamic contract between a government and a private entity, wherein the latter commits to pay the government in return for the exclusive right to sell a service by operating a public facility. Private revenues are modelled as depending on the unobservable ability to seize market opportunities and on imperfectly correlated changes in consumers’ preferences. We show that optimal regulation requires an appropriate combination of fixed and variable payments to the government, acting together both as an information revelation mechanism and as a risk sharing device.

Keywords: Public-private partnerships, Public franchises, Adverse selection, Dynamic contracts, Persistent demand shocks

JEL Classification: D81, D82, D86, H54

Suggested Citation

Buso, Marco and Dosi, Cesare and Moretto, Michele, Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks (February 13, 2023). FEEM Working Paper No. 03, Available at SSRN: https://ssrn.com/abstract=4357859 or http://dx.doi.org/10.2139/ssrn.4357859

Marco Buso (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica ( email )

via Del Santo 33
Padova, 35123
Italy
049+8274049 (Phone)
049+8274221 (Fax)

Michele Moretto

University of Padua, Dep of Economics and Management ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

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