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Government Outsourcing: Public Contracting with Private Monopoly

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  • Emmanuelle Auriol
  • Pierre M. Picard

Abstract

The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds. An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where government commits to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-05/cesifo1_wp1733.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1733.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1733

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Keywords: privatization; soft-budget constraint; adverse selection; regulation; natural monopoly;

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References

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  1. J�nos Kornai & Eric Maskin & G�rard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
  2. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
  4. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, vol. 56(1), pages 125-141, January.
  5. Stéphane Jacobzone, 2000. "Pharmaceutical Policies in OECD Countries: Reconciling Social and Industrial Goals," OECD Labour Market and Social Policy Occasional Papers 40, OECD Publishing.
  6. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Klaus M. Schmidt, 1995. "Incomplete Contracts and Privatization," Discussion Paper Serie A 480, University of Bonn, Germany.
  8. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  9. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  10. Auriol, Emmanuelle & Picard, Pierre, 2004. "Privatizations in Developing Countries and the Government's Budget Constraint," IDEI Working Papers 459, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
  13. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  14. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
  15. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  16. Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper.
  17. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
  18. Kornai, Janos & Weibull, Jorgen W., 1983. "Paternalism, buyers' and sellers' market," Mathematical Social Sciences, Elsevier, vol. 6(2), pages 153-169, November.
  19. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
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Citations

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Cited by:
  1. Auriol, Emmanuelle & Picard, Pierre, 2011. "A Theory of BOT Concession Contracts," TSE Working Papers 11-228, Toulouse School of Economics (TSE).
  2. PICARD, Pierre & RUSLI, Ridwan D., 2012. "State owned firms: private debt, cost revelation and welfare," CORE Discussion Papers 2012047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Heijdra, B.J. & Ligthart, J.E., 2005. "Fiscal Policy, Monopolistic Competition and Finite Lives," Discussion Paper 2005-126, Tilburg University, Center for Economic Research.
  4. 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, vol. 44(4), pages 393-422, June.
  5. Qiu, Larry D. & Wang, Susheng, 2011. "BOT projects: Incentives and efficiency," Journal of Development Economics, Elsevier, vol. 94(1), pages 127-138, January.
  6. 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.

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