Abstract

AbstractThe government wants an infrastructure‐based public service to be provided. First, the infrastructure has to be built; subsequently, it has to be operated. Should the government bundle the building and operating tasks in a public–private partnership? Or should it choose traditional procurement (i.e., delegate the tasks to different firms)? Each task entails unobservable investments to come up with innovations. It turns out that, depending on the nature of the innovations, bundling can either stimulate or discourage investments. Moreover, we find that if renegotiation cannot be prevented, public–private partnerships might lead the government to deliberately opt for technologically inferior projects.

Highlights

  • Providing infrastructure-based public services is one of the main tasks of government

  • The relatively new organizational form of public-private partnerships was promoted to foster incentives to innovate, such that increased quality would be achieved at lower costs

  • Our model explains in a uni...ed framework that compared to traditional procurement, a public-private partnership may either foster or sti‡e innovation incentives, depending on whether successes in the two stages are of a complementary or of a substitutive nature

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Summary

Introduction

Providing infrastructure-based public services is one of the main tasks of government. In our model the pros and cons of bundling the building and operating tasks in a public-private partnership can be traced back to the same source, namely the e¤ect of expected second-stage rents on ...rst-stage incentives. After a ...rst-stage failure the government implements a smaller second-stage e¤ort level under a public-private partnership than under traditional procurement, so the consortium is punished for not developing an innovation in the building stage. The theoretical literature analyzing the pros and cons of bundling tasks in public-private partnerships was initiated by Hart (2003), who applies the incomplete contracting approach.9 Hart (2003) considers two di¤erent kinds of investments which both can be made in the building stage in order to reduce costs in the operating stage.

The Model
Traditional Procurement
Public-Private Partnership
Public-Private Partnership Versus Traditional
G HTP G PPP
Renegotiation
Findings
Concluding Remarks
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