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Optimal Public Procurement Contracts Under a Soft Budget Constraint

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Ville Mälkönen
Abstract

This paper presents a model where the central government cannot ensure that regional governments manage risks prudentially, due to soft budget constraint. Competition for project funding induces the regional governments use financial instruments as commitment devices as a signal of prudential risk management. A Public-Private Partnership contract, which delegates the monitoring task to a financial institute, is the most efficient commitment device provided that private financiers have an access to the same monitoring technology the regional governments fail to employ. The optimal capital structure of a PPP contract is a combination of public funds and debt from financial institutes. JEL Classification: D8, L3, H54, H57

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 464.

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Date of creation: 31 Dec 2008
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Handle: RePEc:fer:dpaper:464

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Keywords: PPP contracts; public investments; moral hazard;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2008. "Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005," Discussion Papers 447, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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  2. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "Nordic Dual Income Taxation of Entrepreneurs," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  3. Tomi Kyyrä, 2008. "Partial Unemployment Insurance Benefits and the Transition Rate to Regular Work," Discussion Papers 440, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  4. Teemu Lyytikäinen, 2007. "The Effect of Three-rate Property Taxation on Housing Construction," Discussion Papers 419, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  5. Juho Aaltonen & Antti Moisio & Kalevi Luoma, 2007. "Secessions of Municipal Health Centre Federations: Expenditure and Productivity Effects," Discussion Papers 425, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  6. Seppo Kari & Hanna Karikallio, 2007. "Tax Treatment of Dividends and Capital Gains and the Dividend Decision Under Dual Income Tax," Discussion Papers 416, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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  7. Tanja Kirjavainen, 2007. "Efficiency of Finnish Upper Secondary Schools: An Application of Stochastic Frontier Analysis with Panel Data," Discussion Papers 428, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  8. Bertrand, Olivier & Nilsson Hakkala, Katariina & Norbäck, Pehr-Johan & Persson, Lars, 2008. "Should R&D Champions be Protected from Foreign Takeovers?," Working Paper Series 772, Research Institute of Industrial Economics. [Downloadable!]
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  1. Ossi Korkeamäki & Tomi Kyyrä, 2008. "A Distributional Analysis of Displacement Costs in an Economic Depression and Recovery," Discussion Papers 465, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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