Risk allocation and the costs and benefits of public--private partnerships

Authors


  • For useful comments or discussions, we wish to thank Malin Arve, John Bennett, Bernard Caillaud, Jérôme Pouyet, Emile Quinet, Timo Välillä and seminar participants at ESNIE (Ajaccio, 2007), at the Congrès de l’Association Française d’Economie (Paris-Sorbonne, 2009), Université de Franche-Comté, the UBC P3 Project (2008, Vancouver), the International Conference Contracts, Procurement, and Public--Private Arrangements (Paris, 2011) and the XIII CEPR/JIE Conference on Applied Industrial Organization (Venice, 2011). Jim Hosek and two referees were instrumental in helping us to reshape our ideas on this project. We thank Perrin Lefebvre for exceptional research assistance. All errors are ours. Iossa gratefully acknowledges financial support from the Ministry of Education, University and Research (MIUR), PRIN grant 2008.

Abstract

We study the agency costs of delegated public service provision, focusing on the link between organizational forms and uncertainty at project implementation. We consider a dynamic multitask moral hazard environment where the mapping between effort and performance is ex ante uncertain but new information may arise during operations. Our analysis highlights the costs and benefits that bundling planning and implementation—as under public--private partnerships—can bring in terms of project design and operational costs under various scenarios, possibly allowing for asymmetric information, moral hazard and renegotiation. It also shows that relying on private finance enhances the benefits of bundling only if lenders have enough expertise to assess project risks.

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