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Bundling versus unbundling: asymmetric information on information externalities

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  • Marco Buso

    (Economics and Tehcnology, University of Padova)

Abstract

This paper addresses the benefits of bundling two sequential activities in the context of public–private partnerships (PPPs). The paper introduces a source of asymmetric information in the form of an externality parameter that links the building stage with subsequent operational activity. Within this framework, bundling allows the government to extract private information about the magnitude of the externality parameter. The framework also implies a higher degree of asymmetric information related to the operational stage than unbundling does when the contract is written. Our results indicate that the use of bundled contracts allows PPPs to be commitment devices that force governments to define ex-ante more coherent and informed plans, thereby improving investments and reducing unexpected cost overruns. However, because of the presence of asymmetric information, bundling makes any cost-reducing effort suboptimal during the operational phase.

Suggested Citation

  • Marco Buso, 2019. "Bundling versus unbundling: asymmetric information on information externalities," Journal of Economics, Springer, vol. 128(1), pages 1-25, September.
    • Handle: RePEc:kap:jeczfn:v:128:y:2019:i:1:d:10.1007_s00712-018-0642-0
    DOI: 10.1007/s00712-018-0642-0
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    References listed on IDEAS

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    Cited by:

    1. Schmitz, Patrick W., 2021. "Optimal ownership of public goods under asymmetric information," Journal of Public Economics, Elsevier, vol. 198(C).
    2. Schmitz, Patrick W., 2023. "The proper scope of government reconsidered: Asymmetric information and incentive contracts," European Economic Review, Elsevier, vol. 157(C).
    3. Schmitz, Patrick W., 2021. "Contracting under adverse selection: Certifiable vs. uncertifiable information," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 100-112.
    4. Kusterer, David J. & Schmitz, Patrick W., 2020. "Public goods, property rights, and investment incentives: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 514-532.
    5. Dan Bogart & Oliver Buxton Dunn & Eduard J. Alvarez‐Palau & Leigh Shaw‐Taylor, 2022. "Organizations and efficiency in public services: The case of English lighthouses revisited," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 975-994, April.
    6. Love, Peter E.D. & Ika, Lavagnon A. & Matthews, Jane & Li, Xinjian & Fang, Weili, 2021. "A procurement policy-making pathway to future-proof large-scale transport infrastructure assets," Research in Transportation Economics, Elsevier, vol. 90(C).
    7. Marco Buso & Luciano Greco, 2021. "The Optimality of Public-Private Partnerships under Financial and Fiscal Constraints," "Marco Fanno" Working Papers 0276, Dipartimento di Scienze Economiche "Marco Fanno".

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    More about this item

    Keywords

    Bundling/unbundling; Agency theory; Information externality; Public–private partnership;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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