Public versus private ownership: Quantity contracts and the allocation of investment tasks

• Published in: Journal of public economics Vol. 94; no. 3; pp. 258 - 268
• Main Authors: Hoppe, Eva I., Schmitz, Patrick W.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-04-2010; Elsevier
• Series: Journal of Public Economics
• Subjects: Bargaining; Contractible control; Contracts; Governance; Incomplete contracts; Incomplete contracts Contractible control Privatization; Investment; Privatization; Public ownership; Public sector; Public-private partnership; Incomplete contracts; Contractible control; D86; D23; Privatization; H11; L33
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2009.11.009

The government wants a certain good or service to be provided. Should the required assets be publicly or privately owned or should a partnership be formed? Building on the incomplete contracting approach, we argue that the initially specified quantity of an ex ante describable basic good can have important effects on investment incentives, which has been neglected in the literature so far. We also study how the tasks of investing in quality improvements and cost reductions should be assigned. We show how the optimal contracts and governance structures depend on the exogenous parameters of the model such as the nature of the investments and the parties' bargaining powers.