DP7056 Public Versus Private Ownership: Quantity Contracts and the Allocation of Investment Tasks

Author(s): Eva I Hoppe-Fischer, Patrick W. Schmitz
Publication Date: November 2008
Keyword(s): Contractible control, Incomplete contracts, Privatization
JEL(s): D23, D86, H11, L33
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7056

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.