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From fixed to state-dependent duration in public-private contracts

Author

Listed:
  • Daniel Danau

    (University of Caen Basse-Normandie, CREM CNRS UMR 6211, France)

  • Annalisa Vinella

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

Abstract

A government delegates a build-operate-transfer project to a private firm. At the contracting stage, the operating cost is unknown. The firm can increase the likelihood of facing a low cost (the good state) by exerting effort when building the infrastructure. Once this is in place, the firm learns the true cost and begins to operate. Under limited commitment, either the firm or the government may renege on the contract. Within this context, we explore how well a contract with a state-dependent duration performs, as compared to the more standard fixed-term contract. Under full commitment, the efficient allocation is decentralized, whether the contractual term is fixed or state-dependent. Under limited commitment, in situations where break-up of the partnership is little costly for the government, the efficient allocation can be decentralized only if it is stipulated that the duration of the contract will be longer in the good state than in the bad state. This result is at odds with the prescription of the literature on "flexible-term" contracts, which recommends a longer contractual length when the operating conditions are unfavourable.

Suggested Citation

  • Daniel Danau & Annalisa Vinella, 2013. "From fixed to state-dependent duration in public-private contracts," Economics Working Paper Archive (University of Rennes & University of Caen) 201344, Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS, revised Jan 2015.
    • Handle: RePEc:tut:cremwp:201344
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    References listed on IDEAS

    as
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    Keywords

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    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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