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

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  • Elisabetta Iossa
  • David Martimort

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 come along during operations. Our analysis points out at the efficiency gains that bundling planning and implementation - as under Public Private Partnerships - can bring in terms of better project design and lower operational costs. Bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector. Bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design/procedure/technology on the cost of operations. The compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which, for high operational risk, can make unbundling optimal. In this context, the use of private finance can help re-establishing the benefit of bundling only if lenders have sufficient expertise to help assessing project risks.

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Bibliographic Info

Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 43 (2012)
Issue (Month): 3 (09)
Pages: 442-474

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Handle: RePEc:bla:randje:v:43:y:2012:i:3:p:442-474

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References

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  1. Martimort, David & Sand-Zantman, Wilfried, 2006. "Signaling and the Design of Delegated Management Contracts for Public Utilities," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
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  17. Gromb, Denis & Martimort, David, 2007. "Collusion and the Organization of Delegated Expertise," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
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  23. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages C69-C76, March.
  24. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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Citations

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Cited by:
  1. Luciano Greco, 2012. "Imperfect Bundling In Public-Private Partnerships," "Marco Fanno" Working Papers 0147, Dipartimento di Scienze Economiche "Marco Fanno".
  2. Martimort, David & Straub, Stéphane, 2012. "How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships," IDEI Working Papers 724, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Schmitz, Patrick W., 2012. "Job design with conflicting tasks reconsidered," MPRA Paper 36914, University Library of Munich, Germany.

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