Public-private partnerships versus traditional procurement: Innovation incentives and information gathering

Hoppe, Eva I. and Schmitz, Patrick W. (2012): Public-private partnerships versus traditional procurement: Innovation incentives and information gathering.

Abstract

A government agency wants a facility to be built and managed to provide a public service. Two different modes of provision are considered. In a public-private partnership, the tasks of building and managing are bundled, whereas under traditional procurement, these tasks are delegated to separate private contractors. The two provision modes differ in their incentives to innovate and to gather private information about future costs to adapt the service provision to changing circumstances. The government agency's preferred mode of provision depends on the information gathering costs, the costs of innovation efforts, and on the degree to which effort is contractible.

• Item Type: MPRA Paper
• Language: English
• Keywords: Public-private partnerships; Integration versus separation; Information gathering; Incomplete contracts
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions ; Privatization ; Contracting Out

References

Aghion, P. and Tirole, J. "The Management of Innovation." Quarterly Journal of Economics, Vol. 109 (1994a), pp. 1185--1209.

Aghion, P. and Tirole, J. "Opening the Black Box of Innovation." European Economic Review, Vol. 38 (1994b), pp. 701--710.

Aghion, P. and Tirole, J. "Formal and Real Authority in Organizations." Journal of Political Economy, Vol. 105 (1997), pp. 1--29.

Baron, D.P. and Myerson, R.B. "Regulating a Monopolist with Unknown Costs." Econometrica, Vol. 50 (1982), pp. 911--930.

Bennett, J. and Iossa, E. "Building and Managing Facilities for Public Services." Journal of Public Economics, Vol. 90 (2006a), pp. 2143--2160.

Bennett, J. and Iossa, E. "Delegation of Contracting in the Private Provision of Public Services." Review of Industrial Organization, Vol. 29 (2006b), pp. 75--92.

Bentz, A., Grout, P.A., and Halonen, M.L. "What Should Governments Buy from the Private Sector - Assets or Services?" Discussion Paper, University of Bristol, 2004.

Besley, T. and Ghatak, M. "Government versus Private Ownership of Public Goods." Quarterly Journal of Economics, Vol. 116 (2001), pp. 1343--1372.

Bös, D. Privatization: A Theoretical Treatment. Oxford: Oxford University Press, 1991.

Cambridge Economic Policy Associates "Public Private Partnerships in Scotland -- Evaluation of Performance." Final Report, 2005.

Chen, B.R. and Chiu, Y.S. "Public-Private Partnerships: Task Interdependence and Contractibility." International Journal of Industrial Organization, Vol. 28 (2010), pp. 591--603.

Chong, E., Huet, F., and Saussier, S. "Auctions, Ex Post Competition and Prices: The Efficiency of Public-Private Partnerships." Annals of Public and Cooperative Economics, Vol. 77 (2006), pp. 521--554.

Chong, E., Huet, F., Saussier, S., and Steiner, F. "Public-Private Partnerships and Prices: Evidence from Water Distribution in France." Review of Industrial Organization, Vol. 29 (2006), pp. 149--169.

Crémer, J. and Khalil, F. "Gathering Information Before Signing a Contract." American Economic Review, Vol. 82 (1992), pp. 566--578.

Crémer, J. and Khalil, F. "Gathering Information Before the Contract is Offered: The Case with Two States of Nature." European Economic Review, Vol. 38 (1994), pp. 675--682.

Crémer, J., Khalil, F., and Rochet, J.-C. "Strategic Information Gathering Before a Contract is Offered." Journal of Economic Theory, Vol. 81 (1998a), pp. 163--200.

Crémer, J., Khalil, F., and Rochet, J.-C. "Contracts and Productive Information Gathering." Games and Economic Behavior, Vol. 25 (1998b), pp. 174--193.

De Palma, A., Leruth, L., and Prunier, G. "Towards a Principal-Agent Based Typology of Risks in Public-Private Partnerships." IMF Working Paper, 2009.

Francesconi, M. and Muthoo, A. "Control Rights in Public-Private Partnerships." Discussion Paper, University of Essex, 2006.

Grossman, S.J. and Hart, O.D. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration." Journal of Political Economy, Vol. 94 (1986), pp. 691--719.

Grimsey, D. and Lewis, M.K. Public Private Partnerships. Cheltenham: Edward Elgar, 2004.

Halonen-Akatwijuka, M. and Pafilis, E. "Reputation and Ownership of Public Goods." CMPO Working Paper 09/211, University of Bristol, 2009.

Hart, O.D. Firms, Contracts and Financial Structure. Oxford: Oxford University Press, 1995.

Hart, O. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships." Economic Journal, Vol. 113 (2003), pp. C69--C76.

Hart, O.D. and Moore, J. "Property Rights and the Nature of the Firm." Journal of Political Economy, Vol. 98 (1990), pp. 1119--1158.

Hart, O., Shleifer, A., and Vishny, R.W. "The Proper Scope of Government: Theory and Application to Prisons." Quarterly Journal of Economics, Vol. 112 (1997), pp. 1127--1161.

HM Treasury PFI: Meeting the Investment Challenge. Norwich: HMSO, 2003.

Hoppe, E.I. and Schmitz, P.W. "Public versus Private Ownership: Quantity Contracts and the Allocation of Investment Tasks." Journal of Public Economics, Vol. 94 (2010a), pp. 258--268.

Hoppe, E.I. and Schmitz, P.W. "The Costs and Benefits of Additional Information in Agency Models with Endogenous Information Structures." Economics Letters, Vol. 107 (2010b), pp. 58--62.

Iossa, E. and Martimort, D. "The Simple Micro-Economics of Public-Private Partnerships." Discussion Paper, Brunel University, 2008.

Iossa, E. and Martimort, D. "The Theory of Incentives Applied to PPPs in the Transport Sector." In A. De Palma, R. Lindsey, E. Quinet, and R. Vickerman, eds., The Handbook of Transportation Economics. Cheltenham: Edward Elgar, 2009.

Iossa, E. and Martimort, D. "Risk Allocation and the Costs and Benefits of Public-Private Partnerships." RAND Journal of Economics (forthcoming).

Kessler, A.S. "The Value of Ignorance." RAND Journal of Economics, Vol. 29 (1998), pp. 339--354.

Khalil, F., Kim, D., and Shin, D. "Optimal Task Design: To Integrate or Separate Planning and Implementation?" Journal of Economics & Management Strategy, Vol. 15 (2006), pp. 457--478.

Laffont, J.-J. and Martimort, D. The Theory of Incentives: The Principal-Agent Model. Princeton, N.J.: Princeton University Press, 2002.

Laffont, J.-J. and Tirole, J. "Privatization and Incentives." Journal of Law, Economics, and Organization, Vol. 7 (1991), pp. 84--105.

Lewis, T.R. and Sappington, D.E.M. "Information Management in Incentive Problems." Journal of Political Economy, Vol. 105 (1997), pp. 796--821.

Martimort, D. "An Agency Perspective on the Costs and Benefits of Privatization." Journal of Regulatory Economics, Vol. 30 (2006), pp. 5--44.

Martimort, D. and Pouyet, J. "To Build or not to Build: Normative and Positive Theories of Public-Private Partnerships." International Journal of Industrial Organization, Vol. 26 (2008), pp. 393--411.

Martimort, D. and Straub, S. "How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships." Discussion Paper, Toulouse School of Economics, 2012.

Monbiot, G. "Very British Corruption." Guardian, January 22, 2002.

OECD Public-Private Partnerships. In Pursuit of Risk Sharing and Value for Money. Paris: OECD Publishing, 2008.

Prendergast, C. "The Provision of Incentives in Firms." Journal of Economic Literature, Vol. 37 (1999), pp. 7--63.

Public Accounts Select Committee "The PFI Contract for the New Dartford and Gravesham Hospital." Twelfth Report, 2000.

Renda, A. and Schrefler, L. "Public-Private Partnerships. Models and Trends in the European Union." Study requested by the European Parliament's committee on Internal Market and Consumer Protection, Brussels, 2006.

Schmidt, K.M. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach." Journal of Law, Economics, and Organization, Vol. 12 (1996a), pp. 1--24.

Schmidt, K.M. "Incomplete Contracts and Privatization." European Economic Review, Vol. 40 (1996b), pp. 569--579.

Schmitz, P.W. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions." RAND Journal of Economics, Vol. 36 (2005), pp. 318--336.

Schmitz, P.W. "Information Gathering, Transaction Costs, and the Property Rights Approach." American Economic Review, Vol. 96 (2006), pp. 422--434.

Shapiro, C. and Willig, R. "Economic Rationales for the Scope of Privatization." In E.N. Suleiman and J. Waterbury, eds., The Political Economy of Private Sector Reform and Privatization. Boulder, CO: Westview Press, 1990.

Shleifer, A. "State versus Private Ownership." Journal of Economic Perspectives, Vol. 12 (1998), pp. 133--150.

Vickerman, R. "Maintenance Incentives under Different Infrastructure Regimes." Utilities Policy, Vol. 12 (2004), pp. 315--322.

Vickers, J. and Yarrow, G. Privatization: An Economic Analysis. Cambridge: MIT Press, 1988.

Yescombe, E.R. Public-Private Partnerships. Oxford: Elsevier, 2007.