The Simple Micro-Economics of Public-Private Partnerships (original) (raw)
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The Optimality of Public- Private Partnerships Under Financial and Fiscal Constraints
2021
The government may delegate two sequential tasks (e.g., building and operating an infrastructure) to the same or different agents (i.e., partnership versus sequential contracts). Agents are risk-neutral but face financial constraints, whereas the government’s contractual capacity may be limited by the renegotiation-proof and fiscal constraints. By relying on history-dependent incentives, the partnership contract corrects moral hazard more effectively than sequential contracts. Thus, it is socially preferred unless bundling different tasks deteriorates the agent’s financial conditions. Our results shed new light on the role of firms’ financial and government’s fiscal conditions in driving the cost-benefit analysis of public-private partnerships.
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2006
Public-private partnerships (PPPs) have become increasingly popular in recent years. We show that for these arrangements to be desirable from a public finance point of view, private firmsmust be productivelymore efficient than the public sector. In particular, PPPs are not a means to save on distortionary taxation. We also characterize the contract that trades off optimally demand risk, user-fee distortions and the opportu-nity cost of public funds, under the assumption that the private sector is more efficient. The private firm is fully insured against demand risk in the case of large and small projects, but bears risk for projects of intermediate size. For small projects, no subsidies are required and the optimal contract length is demand contingent. By con-trast, demand contingent subsidies are handed out in every state of demand for large projects and the contract lasts indefinitely. For projects of intermediate size the optimal contract involves a “minimum income guarantee” and...
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