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Corruption in PPPs, Incentives and Contract Incompleteness

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Abstract

In a public procurement setting, we discuss the desirability of completing contracts with state-contingent clauses providing for monetary compensations to the contractor when revenue shocks occur. Realized shocks are private information of the contractor and this creates agency costs of delegated service provision. Verifying the contractor’s messages on the shocks entails contracting costs that make incomplete contracts attractive, despite their higher agency costs. A public official (supervisor) has private information on contracting costs and chooses the degree of contractual incompleteness on behalf of an upper-tier public authority. As the public official may be biased towards the contractor, delegating the contractual choice to that lower-tier may result in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contract terms are discussed.

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  • Elisabetta Iossa & David Martimort, 2014. "Corruption in PPPs, Incentives and Contract Incompleteness," CEIS Research Paper 317, Tor Vergata University, CEIS, revised 18 Jul 2014.
  • Handle: RePEc:rtv:ceisrp:317
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    Cited by:

    1. Malin Arve & David Martimort, 2016. "Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts," American Economic Review, American Economic Association, vol. 106(11), pages 3238-3274, November.
    2. Chiappinelli, Olga, 2016. "Political corruption in the execution of public contracts," MPRA Paper 73487, University Library of Munich, Germany.
    3. repec:ces:ifodic:v:12:y:2014:i:3:p:19126465 is not listed on IDEAS
    4. Olga Chiappinelli, 2016. "Political Corruption in the Execution of Public Contracts," Discussion Papers of DIW Berlin 1607, DIW Berlin, German Institute for Economic Research.
    5. Elisabetta Iossa & David Martimort, 2014. "Corruption in Public-Private Partnerships, Incentives and Contract Incompleteness," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(3), pages 14-16, October.

    More about this item

    Keywords

    Corruption; Incomplete Contracts; Moral Hazard; Principal-Agent-Supervisor Model; Public-Private Partnerships; Risk Allocation;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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