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Public-Private Partnership: Information Externality in Sequential Investments

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  • Marco Buso

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    (University of Padova)

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    Abstract

    This paper studies the benet coming from bundling two sequential activities in a context of Public Private Partnerships (PPPs). Differently from previous literature, I introduce a source of asymmetric information in the form of an externality parameter linking the building stage with subsequent operational activity. Within this framework, PPPs allow the government to extract private information about the sign and magnitude of the externality parameter and to to minimize the informational rents needed to incentivize the builder's effort. Our results suggest how PPPs can become those commitment devices that force governments to define more coherent and informed plans that optimize the first period welfare, improving investment to reduce unexpected ex post costs (cost overruns).

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    File URL: http://economia.unipd.it/sites/decon.unipd.it/files/20140176.pdf
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    Bibliographic Info

    Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0176.

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    Length: 30 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:pad:wpaper:0176

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    Keywords: agency theory; information externality; sequential investment; bundling.;

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    1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Documentos de Trabajo 234, Centro de Economía Aplicada, Universidad de Chile.
    2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2010. "The economics of infrastructure finance: Public-private partnerships versus public provision," Documentos de Trabajo 276, Centro de Economía Aplicada, Universidad de Chile.
    3. Elisabetta Iossa & David Martimort, 2008. "The Simple Micro-Economics of Public-Private Partnerships," CEIS Research Paper 139, Tor Vergata University, CEIS, revised 15 Feb 2013.
    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 12-315, Toulouse School of Economics (TSE).
    5. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2005. "Concessions of Infrastructure in Latin America: Government-led Renegotiation," ESE Discussion Papers 132, Edinburgh School of Economics, University of Edinburgh.
    6. Oliver Hart, 2002. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," The Centre for Market and Public Organisation 02/061, Department of Economics, University of Bristol, UK.
    7. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2009. "Soft budgets and Renegotiations in Public-Private Partnerships," Documentos de Trabajo 265, Centro de Economía Aplicada, Universidad de Chile.
    8. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, 09.
    9. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
    10. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    11. Luciano Greco, 2012. "Imperfect Bundling In Public-Private Partnerships," "Marco Fanno" Working Papers 0147, Dipartimento di Scienze Economiche "Marco Fanno".
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