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Arm’s Length Provision of Public Services

Listed author(s):
  • Morten Bennedsen

    (Copenhagen Business School)

  • Christian Schultz

    (Department of Economics, University of Copenhagen)

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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File URL: http://www.econ.ku.dk/cie/dp/dp_2010/2007-12.pdf/
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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2007-12.

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Length: 42 pages
Date of creation: Nov 2007
Handle: RePEc:kud:kuieci:2007-12
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