The Simple Micro-Economics of Public-Private Partnerships

Iossa ElisabettaMartimort David
CEIS Research Paper
We build on the existing literature in Public Private Partnerships (PPP) to analyze the main incentive issues in PPPs and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multi-task environment in which a risk averse fi rm chooses non-contractible e fforts in cost reduction and quality improvement. We fi rst consider the eff ect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for di fferent assumptions on feasible contracts and information available to the government. Then we extend the model in novel directions. We study the relationship between the operator and its financiers and the impact of private fi nance. We discuss the trade-o ff between incentive and exibility in PPP agreements and the dynamics of PPPs, including cost overruns. We also consider how institutions, and speci cally the risk of regulatory opportunism, aff ects contract design and incentives. The conclusion summarizes policy implications on the desirability of PPPs
Number: 139
Keywords: Public-private partnerships, public-service provision
JEL codes: D8, L5, H54, H57
Volume: 6
Issue: 12
Date: Friday, December 19, 2008
Revision Date: Friday, February 15, 2013