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Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks

Author

Listed:
  • Marco Buso

    (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics (CRIEP))

  • Cesare Dosi

    (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics (CRIEP))

  • Michele Moretto

    (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics (CRIEP))

Abstract

In a continuous-time setting, we study the design of a dynamic contract between a government and a private entity, wherein the latter commits to pay the government in return for the exclusive right to sell a service by operating a public facility. Private revenues are modelled as depending on the unobservable ability to seize market opportunities and on imperfectly correlated changes in consumers’ preferences. We show that optimal regulation requires an appropriate combination of fixed and variable payments to the government, acting together both as an information revelation mechanism and as a risk sharing device.

Suggested Citation

  • Marco Buso & Cesare Dosi & Michele Moretto, 2023. "Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks," Working Papers 2023.03, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2023.03
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Public-private partnerships; Public franchises; Adverse selection; Dynamic contracts; Persistent demand shocks;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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