Public-Private Partnerships, Asymmetric Information, and Incomplete Contracts

Schmitz, Patrick W. (2025): Public-Private Partnerships, Asymmetric Information, and Incomplete Contracts.

Abstract

We develop an incomplete-contracting model in which the government engages a private contractor to provide a public good. Over time, adaptations of the good to changing circumstances may become desirable. The contractor privately learns the costs of implementing these adaptations. We compare two organizational forms. In a public-private partnership, the government actively participates in project management and, by incurring information-gathering costs, may ascertain the contractor's adaptation costs. Under traditional procurement, the government lacks direct involvement in project management, preventing it from ascertaining the adaptation costs. We show that the government's potentially enhanced access to the contractor's information in a public-private partnership can either support or undermine the case for such partnerships.

• Item Type: MPRA Paper
• Language: English
• Keywords: public-private partnerships; traditional procurement; asymmetric information; incomplete contracts; information gathering
• Subjects: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; H - Public Economics > H5 - National Government Expenditures and Related Policies > H57 - Procurement; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions ; Privatization ; Contracting Out

References

Anderson, C. (2013). Rethinking public-private space travel. Space Policy 29, 266--271.

Buso, M. (2019). Bundling versus unbundling: Asymmetric information on information externalities. Journal of Economics 128, 1--25.

Buso, M. and L. Greco (2023). The optimality of public-private partnerships under financial and fiscal constraints. Journal of Economics and Management Strategy 32, 856--881.

Buso, M., F. Marty, and P.T. Tran (2017). Public-private partnerships from budget constraints: Looking for debt hiding? International Journal of Industrial Organization 51, 56--84.

d'Aspremont, C. and L.A. Gérard-Varet (1979). Incentives and incomplete information. Journal of Public Economics 11, 25--45.

D'Souza, A., K. Hoyt, C.M. Snyder, and A. Stapp (2025). Can Operation Warp Speed serve as a model for accelerating innovations beyond COVID vaccines? Entrepreneurship and Innovation Policy and the Economy 4, 103--138.

Engel, E., R.D. Fischer, and A. Galetovic (2014). The Economics of Public-Private Partnerships: A Basic Guide. Cambridge University Press.

Fay, M., D. Martimort, and S. Straub (2021). Funding and financing infrastructure: The joint-use of public and private finance. Journal of Development Economics 150, 102629.

Fouad, M., C. Matsumoto, R.S. Monteiro, I. Rial, and O. Aydin Sakrak (2021). Mastering the Risky Business of Public-Private Partnerships in Infrastructure. International Monetary Fund.

Greco, L. (2015). Imperfect bundling in public-private partnerships. Journal of Public Economic Theory 17, 136--146.

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

Grossman, S.J. and O.D. Hart (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94, 691--719.

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

Hart, O. (2003). Incomplete contracts and public ownership: Remarks, and an application to public-private partnerships. Economic Journal 113, C69--C76.

Hart, O. (2017). Incomplete contracts and control. American Economic Review 107, 1731--1752.

Hart, O. and J. Moore (2008). Contracts as reference points. Quarterly Journal of Economics 123, 1--48.

Hart, O., A. Shleifer, and R.W. Vishny (1997). The proper scope of government: Theory and application to prisons. Quarterly Journal of Economics 112, 1127--1161.

Hoppe, E.I. and P.W. Schmitz (2010). Public versus private ownership: Quantity contracts and the allocation of investment tasks. Journal of Public Economics 94, 258--268.

Hoppe, E.I. and P.W. Schmitz (2013). Public-private partnerships versus traditional procurement: Innovation incentives and information gathering. Rand Journal of Economics 44, 56--74.

Hoppe, E.I. and P.W. Schmitz (2021). How (not) to foster innovations in public infrastructure projects. Scandinavian Journal of Economics 123, 238--266.

Iossa, E. and D. Martimort (2015). The simple microeconomics of public-private partnerships. Journal of Public Economic Theory 17, 4--48.

Martimort, D. and S. Straub (2016). How to design infrastructure contracts in a warming world: A critical appraisal of public--private partnerships. International Economic Review 57, 61--88.

Moore, J. (2016). Introductory remarks on Grossman and Hart (1986). In: Aghion, P., Dewatripont, M., Legros, P., Zingales, L. (Eds). The Impact of Incomplete Contracts on Economics. Oxford University Press.

Pi, J. (2021). An investigation of seeming favoritism in public procurement. Manchester School 89, 128--137.

Rachman, G. (2021). Why the European Commission failed the vaccine challenge. Financial Times, February 1.

Reuters Staff (2017). Report shows 1,300 unfilled jobs, strain for German defense procurement. Reuters, December 13.

Schmitz, P.W. (2006). Information gathering, transaction costs, and the property rights approach. American Economic Review 96, 422--434.

Schmitz, P.W. (2008). Joint ownership and the hold-up problem under asymmetric information. Economics Letters 99, 577--580.

Schmitz, P.W. (2023). The proper scope of government reconsidered: Asymmetric information and incentive contracts. European Economic Review 157, 104511.