Political Accountability, Incentives, and Contractual Design of Public Private Partnerships

Abstract

This paper studies political accountability under various contractual forms of Public Private Partnerships. A critical aspect of any PPP contract is the allocation of demand risk between the public authority and the private provider. We show that contracts in which the private provider bears all demand risk motivate more the public authority from responding to customer needs, since they empower consumers, which provides the public authority with more credibility in side-trading. The policy implication is that the current greater resort to contracts in which the public authority retains all demand risk may not be optimal in terms of allocative efficiency.