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Discussion Paper Details

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Title: Government Outsourcing: Public Contracting with Private Monopoly

Author(s): Emmanuelle Auriol and Pierre M Picard

Publication Date: April 2006

Keyword(s): adverse selection, natural monopoly, privatization, regulation and soft-budget constraint

Programme Area(s): Industrial Organization

Abstract: The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds la Laffont and Tirole (1993). An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.

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Bibliographic Reference

Auriol, E and Picard, P. 2006. 'Government Outsourcing: Public Contracting with Private Monopoly'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5643