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Arm’s Length Provision of Public Services

  • Morten Bennedsen
  • Christian Schultz

We analyze the economic consequences of strategic delegation of the right to decide between public or private provision of governmental service and/or the authority to negotiate and renegotiate with the chosen service provider. Our model encompass both bureaucratic delegation from a government to a privatization agency and electoral delegation from voters to a government. We identify two powerfull effects of delegation when contracts are incomplete: The incentive effect increases the incentive part of service providers’ remuneration and we show that strategic delegation may substitute formal incentive contracts. The bargaining effect improves the bargaining position vis a vis a private firm with market power and leads to a lower price for the service.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2161.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ces:ceswps:_2161
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  1. Besley, Timothy J. & Ghatak, Maitreesh, 2001. "Government versus Private Ownership of Public Goods," CEPR Discussion Papers 2725, C.E.P.R. Discussion Papers.
  2. 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.
  3. Matthew Ellman, 2006. "Does privatising public service provision reduce accountability?," Economics Working Papers 997, Department of Economics and Business, Universitat Pompeu Fabra.
  4. repec:oup:restud:v:66:y:1999:i:1:p:115-38 is not listed on IDEAS
  5. Frank A. Sloan & Gabriel A. Picone & Donald H. Taylor, Jr. & Shin-Yi Chou, 1998. "Hospital Ownership and Cost and Quality of Care: Is There a Dime's Worth of Difference?," NBER Working Papers 6706, National Bureau of Economic Research, Inc.
  6. Andrei Shleifer, 1998. "State Versus Private Ownership," NBER Working Papers 6665, National Bureau of Economic Research, Inc.
  7. repec:oup:qjecon:v:112:y:1997:i:4:p:1127-61 is not listed on IDEAS
  8. repec:oup:qjecon:v:109:y:1994:i:4:p:995-1025 is not listed on IDEAS
  9. Eric Fredland, 2004. "Outsourcing Military Force: A Transactions Cost Perspective on the Role of Military Companies," Defence and Peace Economics, Taylor & Francis Journals, vol. 15(3), pages 205-219.
  10. Jean-Jacques Laffont & Jean Tirole, 1991. "Privatization and Incentives," Working papers 572, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Bennedsen, Morten, 2000. "Political ownership," Journal of Public Economics, Elsevier, vol. 76(3), pages 559-581, June.
  12. repec:oup:restud:v:66:y:1999:i:1:p:83-114 is not listed on IDEAS
  13. repec:oup:qjecon:v:100:y:1985:i:4:p:1169-89 is not listed on IDEAS
  14. 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.
  15. Jonathan Levin & Steven Tadelis, 2007. "Contracting for Government Services: Theory and Evidence from U.S. Cities," NBER Working Papers 13350, National Bureau of Economic Research, Inc.
  16. repec:oup:qjecon:v:116:y:2001:i:4:p:1343-1372 is not listed on IDEAS
  17. Paul H. Jensen & Robin E. Stonecash, 2005. "Incentives and the Efficiency of Public Sector-outsourcing Contracts," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 767-787, December.
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