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Signaling and the Design of Delegated Management for Public Utilities

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  • Martimort, D.
  • Sand-Zantman, W.

Abstract

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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Bibliographic Info

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.

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Length: 34 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:mop:lasrwp:2004.11

Contact details of provider:
Postal: LASER, Faculté d'Economie, Avenue Raymond Dugrand, CS 79606, 34960 MONTPELLIER Cedex 2, France
Web page: http://www.laser.univ-montp1.fr
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Keywords: INFORMED PRINCIPAL ; SIGNALING GAMES ; INCENTIVES ; DELEGATION;

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