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Government Outsourcing: Public Contracting with Private Monopoly

  • Emmanuelle Auriol
  • Pierre M. Picard

The article studies the impact of the government budget constraint on the regulation of natural monopolies in adverse selection contexts. The government maximises total surplus but incurs some cost of public funds "à la" Laffont and Tirole (1993). Government outsourcing is proposed as an alternative to regulation in which firms freely enter the market and choose their prices and output levels. However the government can contract "ex post" with the private firms. This "ex post" contracting set-up allows more flexibility than regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 119 (2009)
Issue (Month): 540 (October)
Pages: 1464-1493

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Handle: RePEc:ecj:econjl:v:119:y:2009:i:540:p:1464-1493
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  1. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science.
  2. 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.
  3. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  5. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  6. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
  7. Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper.
  8. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  9. Auriol, Emmanuelle & Picard, Pierre, 2004. "Privatizations in Developing Countries and the Government's Budget Constraint," IDEI Working Papers 459, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," Munich Reprints in Economics 19776, University of Munich, Department of Economics.
  11. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, vol. 56(1), pages 125-141, January.
  12. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May.
  13. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  14. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
  15. Stéphane Jacobzone, 2000. "Pharmaceutical Policies in OECD Countries: Reconciling Social and Industrial Goals," OECD Labour Market and Social Policy Occasional Papers 40, OECD Publishing.
  16. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
  17. Kornai, Janos & Weibull, Jorgen W., 1983. "Paternalism, buyers' and sellers' market," Mathematical Social Sciences, Elsevier, vol. 6(2), pages 153-169, November.
  18. Jean-Jacques Laffont & Jean Tirole, 1991. "Privatization and Incentives," Working papers 572, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. 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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