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Public-private contracting under limited commitment

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  • Daniel Danau

    (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211)

  • Annalisa Vinella

    (Università degli Studi di Bari "Aldo Moro", Italy)

Abstract

A government delegates construction and operation of an essential facility to a private firm. When parties sit at the contracting table, they are uncertain about the operating cost. At the construction stage, the firm can improve its distribution by exerting some non-contractible effort. As soon as the facility is in place, the firm learns the realized cost privately. In case any of the parties breaks down the relationship and the firm is replaced during the operation phase, the government bears a cost that is more important the earlier the interruption, relative to the stipulated duration. We show that, under limited commitment, the optimal full-commitment allocation is implementable if and only if the firm holds some minimum amount of own funds that can be destined to the project, it is able to borrow funds for that specific project, and the replacement cost is sufficiently high. Implementation is made by instructing the firm to invest some intermediate amount of own and borrowed funds, by conditioning the loan guarantee (provided under the aegis of a third party not suffering from commitment problems) on the outcome of the potential renegotiation process between the government and the firm, and by setting duration neither too short nor too long. Making duration contingent on the realized operating cost helps the government lessen the more concerning between moral-hazard and commitment problems.

Suggested Citation

  • Daniel Danau & Annalisa Vinella, 2012. "Public-private contracting under limited commitment," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201227, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  • Handle: RePEc:tut:cremwp:201227
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    Cited by:

    1. Daniel Danau & Annalisa Vinella, 2021. "Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 923-966, December.
    2. 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.
    3. Giuseppe Di Liddo & Annalisa Vinella, 2022. "Asymmetric yardstick competition: traditional procurement versus public-private partnerships," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(3), pages 669-695, November.
    4. 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.
    5. Engel, Eduardo M.R:A. & Fischer, Ronald & Galetovic, Alexander, 2019. "Soft budgets and endogenous renegotiations in transport PPPs: An equilibrium analysis," Economics of Transportation, Elsevier, vol. 17(C), pages 40-50.
    6. 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.
    7. Hartman, Paul & Ogden, Jeff & Jackson, Ross, 2020. "Contract duration: Barrier or bridge to successful public-private partnerships?," Technology in Society, Elsevier, vol. 63(C).
    8. 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.
    9. 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.
    10. Ram Singh, 2018. "Public–private partnerships vs. traditional contracts for highways," Indian Economic Review, Springer, vol. 53(1), pages 29-63, December.

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    More about this item

    Keywords

    public-private contracting; limited commitment; duration; private funds; debt; guarantees; replacement cost;
    All these keywords.

    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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