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Hierarchical contracting in grant decisions: ex-ante and ex-post evaluation in the context of the EU Structural Funds

Author

Listed:
  • Michela Cella

    (University of Milan-Bicocca)

  • Massimo Florio

    (University of Milan)

Abstract

This paper presents a simple principal-supervisor-agent model of the investment game between a supranational player (the principal), such as the European Commission, a regional government (the supervisor), and a private firm (the executing agency) . The EC is a benevolent social welfare maximiser, the regional government has an objective function that combines private benefits to politicians and the welfare of their constituency, the agent is a utility maximiser. The latter can be of a high or low efficiency type, and the operative cost, observable ex post, depends upon this binary technology and managerial effort, also unobservable. The EC offers a matching capital grant to the firm (as it does with the EU Structural Funds), intended to cover part of the investment cost of an otherwise unprofitable project. The regional government offers the remaining share of the subsidy. If the firm claims to be inefficient, the EC can send with some probability an ex-post evaluator and there is a penalty if she discovers that it is of the efficient-type. Moreover the regional government can collaborate with the EC to disclose additional information it may have on the firm, but it needs to be given a reward not to collude with the firm, that is in turn willing to offer a private benefit to the regional government to conceal unfavourable evidence. We show that the role of these providers of additional information is essential to reducing the value of the grant and in improving the inefficiencies caused by asymmetric information and the grant decision stage. The paper suggests that the EC should include ex-post evaluation, currently provided by the Structural Funds regulations, within regional planning contracts for infrastructure investment; and that regional governments should be offered a reward for disclosing additional information on the firm technology (ex-ante supervision).

Suggested Citation

  • Michela Cella & Massimo Florio, 2007. "Hierarchical contracting in grant decisions: ex-ante and ex-post evaluation in the context of the EU Structural Funds," UNIMI - Research Papers in Economics, Business, and Statistics unimi-1059, Universitá degli Studi di Milano.
    • Handle: RePEc:bep:unimip:unimi-1059
    Note: oai:cdlib1:unimi-1059
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    Cited by:

    1. Sallam, Walid & Ahmed, Osama, 2020. "The socio-economic assessment to evaluate the potentiality of developing the rural community in Upper Egypt," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 8(2), pages 143-165.
    2. Massimo Florio & Silvia Vignetti, 2008. "Building a bridge across CBA traditions: the contribution of EU Regional Policy," Working Papers 200908, CSIL Centre for Industrial Studies.
    3. Ginés Rus & M. Socorro, 2010. "Infrastructure Investment and Incentives with Supranational Funding," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 17(3), pages 551-567, September.
    4. Osama Ahmed & Walid Sallam, 2020. "Assessing the Potential of Improving Livelihoods and Creating Sustainable Socio-Economic Circumstances for Rural Communities in Upper Egypt," Sustainability, MDPI, vol. 12(16), pages 1-23, August.
    5. Massimo Florio & Silvia Vignetti, 2013. "The use of ex post Cost-Benefit Analysis to assess the long-term effects of Major Infrastructure Projects," Working Papers 201302, CSIL Centre for Industrial Studies.

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