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Public-Private Contracting under Limited Commitment

Author

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  • Daniel Danau

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Annalisa Vinella

    (Dipartimento di Scienze economiche e metodi matematici - Università degli studi di Bari)

Abstract

A government delegates a build-operate-transfer project to a private firm in a limited-commitment framework. When the contract is signed, parties are uncertain about the operating cost. The firm can increase the likelihood of facing a low cost by exerting some non-contractible effort while building the facility. Once the facility is in place, the firm learns the marginal cost and begins to operate. We characterize the contract which stipulates the efficient allocation. We study the financial structure and duration that secure its enforcement. To this end, we take into account that break-up of the partnership occasions a replacement cost for the government and an expropriation cost for the firm and its lender. urthermore, both these costs are higher the earlier the contract is terminated. Enforcement is achieved as follows. The firm is instructed to invest some ntermediate amount of own and borrowed funds. Under the aegis of a third party that can commit, the overnment provides guarantees to the lender, conditional on continuation of the partnership. Duration may be shortened, though not to the point where the initial effort of the firm is uncompensated.

Suggested Citation

  • Daniel Danau & Annalisa Vinella, 2015. "Public-Private Contracting under Limited Commitment," Post-Print halshs-00939872, HAL.
  • Handle: RePEc:hal:journl:halshs-00939872
    DOI: 10.1111/jpet.12113
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00939872
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    Cited by:

    1. Eduardo Araral, 2014. "Policy and regulatory design for developing countries: a mechanism design and transaction cost approach," Policy Sciences, Springer;Society of Policy Sciences, vol. 47(3), pages 289-303, September.
    2. repec:bla:jemstr:v:26:y:2017:i:3:p:636-660 is not listed on IDEAS
    3. Antonio Estache & Tomas Serebrisky & Liam Wren-Lewis, 2015. "Financing infrastructure in developing countries," Oxford Review of Economic Policy, Oxford University Press, vol. 31(3-4), pages 279-304.
    4. Daniel Danau & Annalisa Vinella, 2016. "Sequential screening and the relationship between principal's preferences and agent's incentives," SERIES 01-2016, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Mar 2016.
    5. Daniel Danau & Annalisa Vinella, 2015. "Sequential screening with privately known characteristics of cost distribution," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201502, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    6. Daniel Danau & Annalisa Vinella, 2017. "From fixed to state-dependent duration in public-private partnerships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 636-660, September.

    More about this item

    Keywords

    contract duration; financial structure; non-commitment; limited enforcement; Public-private contracts; expropriation; replacement cost; conditional guarantees;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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