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Risk Allocation and the Costs and Benefits of Public-Private Partnerships

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  • Iossa, Elisabetta
  • Martimort, David

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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Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Docweb) with number 1104.

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Length: 37 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:cpm:docweb:1104

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Citations

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Cited by:
  1. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, Elsevier, vol. 57(C), pages 108-117.
  2. Emily Poole & Carl Toohey & Peter Harris, 2014. "Public Infrastructure: A Framework for Decision-making," RBA Annual Conference Volume, Reserve Bank of Australia, in: Alexandra Heath & Matthew Read (ed.), Financial Flows and Infrastructure Financing Reserve Bank of Australia.
  3. Julie de Brux & Frederic Marty, 2014. "IPPP Risks and opportunities an economic perspective," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2014-11, Observatoire Francais des Conjonctures Economiques (OFCE).
  4. Martimort, David & Straub, Stéphane, 2012. "How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships," TSE Working Papers, Toulouse School of Economics (TSE) 12-315, Toulouse School of Economics (TSE).
  5. Schmitz, Patrick W., 2013. "Public Procurement in Times of Crisis: The Bundling Decision Reconsidered," MPRA Paper 53712, University Library of Munich, Germany.
  6. Marco Buso, 2014. "Public-Private Partnership: Information Externality in Sequential Investments," "Marco Fanno" Working Papers 0176, Dipartimento di Scienze Economiche "Marco Fanno".
  7. Antonio García-Lorenzo, 2014. "Cooperación público-privada en la prestación de servicios públicos: el conflicto entre la flexibilidad y la incertidumbre," SERMED 2014 Conference Papers, Instituto Universitario de Análisis Económico y Social p08, Instituto Universitario de Análisis Económico y Social.
  8. Luciano Greco, 2012. "Imperfect Bundling In Public-Private Partnerships," "Marco Fanno" Working Papers 0147, Dipartimento di Scienze Economiche "Marco Fanno".
  9. Hellowell, Mark, 2013. "PFI redux? Assessing a new model for financing hospitals," Health Policy, Elsevier, Elsevier, vol. 113(1), pages 77-85.

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