We propose a theory explaining the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf. Governments are privately informed over the quality of the facility and risk-averse while risk-neutral contractors are subject to a moral hazard problem. We show how the design of the contract signals the asymmetric information parameter. The higher the quality of the network, the higher the marginal return and the greater the share of operating risk kept by the government. This reduces the agent’s marginal incentives, creating a trade-off between signalling and moral hazard. This trade-off is analyzed in different contexts allowing for risk-aversion on the agent’s side, double moral hazard and political economy issues. Lastly, a model of delegated signalling is developed highlighting the difficulty of designing separating contracts when governments are under the countervailing influences of both the contractors and the voters.
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Paper provided by LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1 in its series Cahiers du LASER (LASER Working Papers) with number
2004.11.
Length: 34 pages Date of creation: 2004 Date of revision: Handle: RePEc:mop:lasrwp:2004.11
Contact details of provider: Postal: Université de Montpellier 1, Faculté des Sciences Economiques, LASER, Av. de la Mer - Espace Richter, CS 79606, 34960 Montpellier Cedex 2, France Web page: http://www.laser.univ-montp1.fr More information through EDIRC
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Find related papers by JEL classification: H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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