DP9141 Incomplete contracts and optimal ownership of public goods

Author(s): Patrick W. Schmitz
Publication Date: September 2012
Keyword(s): incomplete contracts, investment incentives, ownership, public goods
JEL(s): D23, D86, H41, L31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9141

The government and a non-governmental organization (NGO) can invest in the provision of a public good. In an incomplete contracting framework, Besley and Ghatak (2001) have argued that the party who values the public good most should be the owner. We show that this conclusion relies on their assumption that the parties split the renegotiation surplus 50:50. If the generalized Nash bargaining solution is applied, then for any pair of valuations that the two parties may have, there exist bargaining powers such that either ownership by the government or by the NGO can be optimal.