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Public–private partnerships, asymmetric information, and incomplete contracts

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  • Schmitz, Patrick W.

Abstract

We develop an incomplete-contracting model in which the government engages a private contractor to provide a public good. Over time, adaptations of the good to changing circumstances may become desirable. The contractor privately learns the costs of implementing these adaptations. We compare two organizational forms. In a public–private partnership, the government actively participates in project management and, by incurring information-gathering costs, may ascertain the contractor’s adaptation costs. Under traditional procurement, the government lacks direct involvement in project management, preventing it from ascertaining the adaptation costs. We show that the government’s potentially enhanced access to the contractor’s information in a public–private partnership can either support or undermine the case for such partnerships.

Suggested Citation

  • Schmitz, Patrick W., 2025. "Public–private partnerships, asymmetric information, and incomplete contracts," Economics Letters, Elsevier, vol. 256(C).
    • Handle: RePEc:eee:ecolet:v:256:y:2025:i:c:s0165176525004860
    DOI: 10.1016/j.econlet.2025.112649
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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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