Private entrepreneurs and public services: The role of endogenous capabilities

Abstract

Available for purchase as an individual chapter online or in the complete book in print or online.Public agencies are increasingly partnering with private entrepreneurs to deliver public services, particularly in developing countries with underdeveloped infrastructures. By sharing their resources and operations, both parties can create new capabilities in the process of value creation and devise new goals. Shared governance modes have shown to preserve the overall quality of services, but the complexity of this joint activity, coupled with the profit-maximizing orientation of private entrepreneurs, may lead to the development of new capabilities that conflict with social interests. We address these concerns by analyzing the endogenous emergence of capabilities in Public Private Partnerships (PPPs) and show how these can be plagued with rent-seeking and mission creep that reduce overall well-being. Drawing upon Penrose’s theory of firm growth, we show that PPPs are most likely to develop capabilities that go against the public interest when entrepreneurs are relatively efficient, contracts governing the provision are unclear as to the expansion of services, the attributes of the product being delivered are difficult to measure, and the service expertise is predominantly provided by the private sector