DP13406 How (Not) to Foster Innovations in Public Infrastructure Projects

Author(s): Eva I Hoppe, Patrick W. Schmitz
Publication Date: December 2018
Keyword(s): innovations, moral hazard, Procurement, public-private partnerships, Renegotiation
JEL(s): D86, H11, H54, H57, L33
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13406

The 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 may either stimulate or discourage investments. Moreover, we find that if renegotiation cannot be prevented, a public-private partnership may lead the government to deliberately opt for a technologically inferior project.