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Signaling and the Design of Delegated Management for Public Utilities

Author

Listed:
  • Martimort, D.
  • Sand-Zantman, W.

Abstract

We propose a theory explaining the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf. Governments are privately informed over the quality of the facility and risk-averse while risk-neutral contractors are subject to a moral hazard problem. We show how the design of the contract signals the asymmetric information parameter. The higher the quality of the network, the higher the marginal return and the greater the share of operating risk kept by the government. This reduces the agent’s marginal incentives, creating a trade-off between signalling and moral hazard. This trade-off is analyzed in different contexts allowing for risk-aversion on the agent’s side, double moral hazard and political economy issues. Lastly, a model of delegated signalling is developed highlighting the difficulty of designing separating contracts when governments are under the countervailing influences of both the contractors and the voters.

Suggested Citation

  • Martimort, D. & Sand-Zantman, W., 2004. "Signaling and the Design of Delegated Management for Public Utilities," Cahiers du LASER (LASER Working Papers) 2004.11, LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1.
  • Handle: RePEc:mop:lasrwp:2004.11
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    File URL: http://www.laser.univ-montp1.fr/Cahiers/cahier110204.pdf
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    References listed on IDEAS

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    1. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
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    3. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 433-446.
    4. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
    5. Dani Rodrik, 1998. "Symposium on Globalization in Perspective: An Introduction," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 3-8, Fall.
    6. Banks, Jeffrey S. & Sundaram, Rangarajan K., 1998. "Optimal Retention in Agency Problems," Journal of Economic Theory, Elsevier, vol. 82(2), pages 293-323, October.
    7. Mukand, Sharun W., 2006. "Globalization and the `confidence game'," Journal of International Economics, Elsevier, vol. 70(2), pages 406-427, December.
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    Citations

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    Cited by:

    1. David Martimort, 2006. "An Agency Perspective on the Costs and Benefits of Privatization," Journal of Regulatory Economics, Springer, vol. 30(1), pages 5-44, July.

    More about this item

    Keywords

    INFORMED PRINCIPAL ; SIGNALING GAMES ; INCENTIVES ; DELEGATION;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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