THE SIMPLE MICROECONOMICS OF PUBLIC-PRIVATE PARTNERSHIPS

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 multitask environment in which a risk-averse firm chooses noncontractible efforts in cost reduction and quality improvement. We first consider the effect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for different 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 finance. We discuss the trade-off between incentive and flexibility in PPP agreements and the dynamics of PPPs, including cost overruns. We also consider how institutions, and specifically the risk of regulatory opportunism, affect contract design and incentives. The conclusion summarizes policy implications on the desirability of PPPs.