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Private investment with social benefits under uncertainty: The dark side of public financing

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  • Giuseppe Attanasi
  • Kene Boun My
  • Marco Buso
  • Anne Stenger

Abstract

We develop a game‐theoretic model of private–public contribution to a long‐term project with sequential actions and moral hazard. A private agent is one who is in charge of both the financial contribution and the management effort, these two actions entailing private costs and uncertain ex‐post private and social benefits. A public agent is one who decides the amount of public funding to this quasi‐public good, knowing that the size and the probability of attaining a surplus ex post depend on the private agent's effort. We consider four public‐funding scenarios: benefit‐sharing versus cost‐sharing crossed with ex‐ante versus ex‐interim government intervention. We test our theoretical predictions by means of an experiment that confirms the main result of the model: Cost‐sharing public intervention is more effective than benefit‐sharing in boosting private financial contribution to the project. Furthermore, when public intervention comes after private contribution ( ex‐interim government intervention), both public‐funding scenarios have a negative impact on the private management effort. In our model, the latter result is explained by the private agent's high degree of risk aversion. These results have policy implications for strategic investments with long‐term social consequences. In deciding the optimal timing and method of the contribution, governments should also consider the indirect effects on agents’ long‐term management efforts.

Suggested Citation

  • Giuseppe Attanasi & Kene Boun My & Marco Buso & Anne Stenger, 2020. "Private investment with social benefits under uncertainty: The dark side of public financing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(3), pages 769-820, June.
  • Handle: RePEc:bla:jpbect:v:22:y:2020:i:3:p:769-820
    DOI: 10.1111/jpet.12358
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    Cited by:

    1. Giuseppe Attanasi & Kene Boun My & Nikolaos Georgantzís & Miguel Ginés, 2019. "Strategic Ethics: Altruism without the Other-Regarding Confound," Revue économique, Presses de Sciences-Po, vol. 70(6), pages 967-998.

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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