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Arm’s Length Provision of Public Services

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Author Info

  • Morten Bennedsen

    (Copenhagen Business School)

  • Christian Schultz

    (Department of Economics, University of Copenhagen)

Abstract

We analyze the economic consequences of strategic delegation of the right to decide between public or private provision of governmental service and/or the authority to negotiate and renegotiate with the chosen service provider. Our model encompass both bureaucratic delegation from a government to a privatization agency and electoral delegation from voters to a government. We identify two powerfull effects of delegation when contracts are incomplete: The incentive effect increases the incentive part of service providers’ remuneration and we show that strategic delegation may substitute formal incentive contracts. The bargaining effect improves the bargaining position vis a vis a private firm with market power and leads to a lower price for the service.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2007-12.

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Length: 42 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:kud:kuieci:2007-12

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Keywords: outsourcing; strategic delegation; incentives; incomplete contracting; market power; representative democracy;

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References

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  1. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
  2. Timothy Besley & Maitreesh Ghatak, 2001. "Government Versus Private Ownership Of Public Goods," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1343-1372, November.
  3. Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1997. "Privatization in the United States," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 447-471, Autumn.
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  6. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  7. 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.
  8. 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.
  9. Oliver Hart & Andrei Shleifer & Robert Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," Harvard Institute of Economic Research Working Papers 1778, Harvard - Institute of Economic Research.
  10. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  11. Matthew Ellman, 2006. "Does privatising public service provision reduce accountability?," Economics Working Papers 997, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Eric Fredland, 2004. "Outsourcing Military Force: A Transactions Cost Perspective on the Role of Military Companies," Defence and Peace Economics, Taylor and Francis Journals, vol. 15(3), pages 205-219.
  13. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  14. Bennedsen, Morten, 2000. "Political ownership," Journal of Public Economics, Elsevier, vol. 76(3), pages 559-581, June.
  15. Jonathan Levin & Steven Tadelis, 2007. "Contracting for Government Services: Theory and Evidence from U.S. Cities," NBER Working Papers 13350, National Bureau of Economic Research, Inc.
  16. Paul H. Jensen & Robin E. Stonecash, 2005. "Incentives and the Efficiency of Public Sector-outsourcing Contracts," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 767-787, December.
  17. 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.
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Cited by:
  1. Bennedsen, Morten & Schultz, Christian, 2011. "Arm's length delegation of public services," Journal of Public Economics, Elsevier, vol. 95(7), pages 543-552.

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