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Optimal Public Procurement Contracts Under a Soft Budget Constraint

  • Ville Mälkönen
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    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

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    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 464.

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    Date of creation: 31 Dec 2008
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    Handle: RePEc:fer:dpaper:464
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    1. Oliver Hart & Andrei Shleifer & Robert Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," Harvard Institute of Economic Research Working Papers 1778, Harvard - Institute of Economic Research.
    2. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    3. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
    4. Eric Maskin & Jean Tirole, 2006. "Public-private Partnerships and Government Spending Limits," Economics Working Papers 0075, Institute for Advanced Study, School of Social Science.
    5. Bent Flyvbjerg & Nils Bruzelius & Werner Rothengatter, 2013. "Megaprojects and Risk: An Anatomy of Ambition," Papers 1303.7404, arXiv.org.
    6. 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.
    7. Yuk-Shee Chan & Anjan V. Thakor, 2004. "Collateral and Competitive Equilibria with Moral Hazard and Private Information," Finance 0411019, EconWPA.
    8. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123.
    9. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
    10. 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 364-78, June.
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