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Government Outsourcing: Public Contracting with Private Monopoly

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  • Emmanuelle Auriol
  • Pierre M. Picard

Abstract

The article studies the impact of the government budget constraint on the regulation of natural monopolies in adverse selection contexts. The government maximises total surplus but incurs some cost of public funds "à la" Laffont and Tirole (1993). Government outsourcing is proposed as an alternative to regulation in which firms freely enter the market and choose their prices and output levels. However the government can contract "ex post" with the private firms. This "ex post" contracting set-up allows more flexibility than regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Suggested Citation

  • Emmanuelle Auriol & Pierre M. Picard, 2009. "Government Outsourcing: Public Contracting with Private Monopoly," Economic Journal, Royal Economic Society, vol. 119(540), pages 1464-1493, October.
    • Handle: RePEc:ecj:econjl:v:119:y:2009:i:540:p:1464-1493
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    Cited by:

    1. S.N. Silvestrov & N.V. Kuznetsov & V.V. Ponkratov & D.A. Smirnov & N.E. Kotova, 2018. "Investment Development of Russian Regions Backed up by Natural Monopolies," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 89-99.
    2. Pierre M. Picard & Ridwan D. Rusli, 2018. "State‐owned firms and private debt," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 20(5), pages 672-702, October.
    3. Auriol, Emmanuelle & Picard, Pierre M., 2013. "A theory of BOT concession contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 187-209.
    4. Marco Buso & Cesare Dosi & Michele Moretto, 2023. "Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks," Working Papers 2023.03, Fondazione Eni Enrico Mattei.
    5. Jullien, Bruno & Pouyet, Jérôme & Sand-Zantman, Wilfried, 2009. "Contracting and Regulation under the Threat of Duplication," IDEI Working Papers 563, Institut d'Économie Industrielle (IDEI), Toulouse.
    6. Auriol, Emmanuelle & Blanc, Aymeric, 2009. "Capture and corruption in public utilities: The cases of water and electricity in Sub-Saharan Africa," Utilities Policy, Elsevier, vol. 17(2), pages 203-216, June.
    7. Emmanuelle Auriol & Stéphane Straub, 2011. "Privatization of Rent-Generating Industries and Corruption," Chapters, in: Susan Rose-Ackerman & Tina Søreide (ed.), International Handbook on the Economics of Corruption, Volume Two, chapter 7, Edward Elgar Publishing.
    8. Li, Shuai & Cai, Jiannan & Cai, Hubo, 2019. "Infrastructure privatization analysis: A public-private duopoly game," Transport Policy, Elsevier, vol. 83(C), pages 80-87.
    9. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    10. Sato, Susumu & Matsumura, Toshihiro, 2019. "Shadow cost of public funds and privatization policies," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    11. Antonio Estache & Tomas Serebrisky & Liam Wren-Lewis, 2015. "Financing infrastructure in developing countries," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 31(3-4), pages 279-304.
    12. Michael Klien, 2014. "Corporatization and the Behavior of Public Firms: How Shifting Control Rights Affects Political Interference in Water Prices," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(4), pages 393-422, June.
    13. Dementiev, Andrei & Han, Hyen Jin, 2020. "A theory of deregulation in public transport," Research in Transportation Economics, Elsevier, vol. 83(C).
    14. Li, Shuai & Cai, Jiannan & Feng, Zhuo & Xu, Yifang & Cai, Hubo, 2019. "Government contracting with monopoly in infrastructure provision: Regulation or deregulation?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 122(C), pages 506-523.
    15. Jos van Bommel & Jose Penalva, 2012. "The Governance of Perpetual Financial Intermediaries," DEM Discussion Paper Series 12-10, Department of Economics at the University of Luxembourg.
    16. Qiu, Larry D. & Wang, Susheng, 2011. "BOT projects: Incentives and efficiency," Journal of Development Economics, Elsevier, vol. 94(1), pages 127-138, January.
    17. Dementiev, Andrei, 2018. "Contracting out public transport services to vertical partnerships," Research in Transportation Economics, Elsevier, vol. 69(C), pages 126-134.
    18. Gilles Edouard Espinosa & Caroline Hillairet & Benjamin Jourdain & Monique Pontier, 2013. "Reducing the debt : is it optimal to outsource an investment?," Papers 1305.4879, arXiv.org, revised Jun 2015.
    19. Gilles Edouard Espinosa & Caroline Hillairet & Benjamin Jourdain & Monique Pontier, 2016. "Reducing the debt : is it optimal to outsource an investment?," Post-Print hal-00824390, HAL.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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