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Optimal Public Procurement Contracts Under a Soft Budget Constraint

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  • Mälkönen, Ville

Abstract

This paper presents a model where the central government cannot ensure that regional governments manage risks prudentially, due to soft budget constraint. Competition for project funding induces the regional governments use financial instruments as commitment devices as a signal of prudential risk management. A Public-Private Partnership contract, which delegates the monitoring task to a financial institute, is the most efficient commitment device provided that private financiers have an access to the same monitoring technology the regional governments fail to employ. The optimal capital structure of a PPP contract is a combination of public funds and debt from financial institutes. JEL Classification: D8, L3, H54, H57

Suggested Citation

  • Mälkönen, Ville, 2008. "Optimal Public Procurement Contracts Under a Soft Budget Constraint," Discussion Papers 464, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:464
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    File URL: https://www.doria.fi/handle/10024/148454
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    References listed on IDEAS

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    1. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123-123.
    2. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-1162, December.
    3. Maskin, Eric & Tirole, Jean, 2008. "Public-private partnerships and government spending limits," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 412-420, March.
    4. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
    5. Bent Flyvbjerg & Nils Bruzelius & Werner Rothengatter, 2013. "Megaprojects and Risk: An Anatomy of Ambition," Papers 1303.7404, arXiv.org.
    6. Chan, Yuk-Shee & Thakor, Anjan V, 1987. " Collateral and Competitive Equilibria with Moral Hazard and Private Information," Journal of Finance, American Finance Association, vol. 42(2), pages 345-363, June.
    7. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    8. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-378, June.
    9. repec:hrv:faseco:30727607 is not listed on IDEAS
    10. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
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    More about this item

    Keywords

    PPP contracts; public investments; moral hazard; Public services; Julkiset palvelut; Effectiveness of public services; Julkisten palvelujen vaikuttavuus;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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