Local Public-Services Provision under Public Private Partnershps : Contractual Design and Contracting Parties Incentives

This paper studies the incentives of the private provider, but also of the public authority, under various contractual forms of Public Private Partnerships (PPPs). A critical aspect of any PPP contract is the allocation of demand risk between the public authority and the private provider. I show that contracts in which the private provider bears demand risk motivate more the public authority from responding to customer needs. This is due to the fact that consumers are empowered when the private provider bears demand risk, i.e. they have the possibility to oust the private provider in case of non-satisfaction with the service provision, which provides procuring authorities with more credibility in side-trading and then more incentives to be responsive. However, contracts in which the private provider does not bear demand risk motivate more the private provider from investing in cost-reducing efforts. I highlight then a tradeoff in the allocation of demand risk between productive and allocative efficiency. The striking policy implication of this paper would be that the current trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal. I apply these results to understanding three famous case studies

Political accountability, incentives, and Contractual design of public private partnerships

Service adaptations, when there is changing demand or problems regarding the service provision, constitute a major issue in Public Private Partnerships (PPPs). So far, studies have explained the ex post adaptation problems by the distorted incentives for the private public-service provider to invest in adaptation efforts. However, as any PPP is between a public authority and a private public-service provider (no market price), public authorities have also an important role to play in the adaptation of the private public-service provision over time. This paper studies how the contractual design of PPPs affects accountability and incentives for contractually unanticipated service adaptations. More specifically, we observe worldwide two main different contracting out procedures: the concession contract and the availability contract. The main difference between these two contractual practices concerns the demand risk, which is borne by private providers in the first case and by public authorities in the second case. This paper shows that there are two main effects of the contractual design on accountability. (1) Concession contracts, compared to availability contracts, motivate more public authorities from investigating and responding to public demands. This is due to the fact that under a concession contract consumers are empowered, i.e. have the possibility to oust the private provider, which provides public authorities with more credibility in side-trading. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts, since, if private providers bear the demand risk, they can receive private gains from implementing the adaptation. The striking policy implication of this paper is then that the trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal in terms of allocative efficiency

Political accountability, incentives, and Contractual design of public private partnerships

Service adaptations, when there is changing demand or problems regarding the service provision, constitute a major issue in Public Private Partnerships (PPPs). So far, studies have explained the ex post adaptation problems by the distorted incentives for the private public-service provider to invest in adaptation efforts. However, as any PPP is between a public authority and a private public-service provider (no market price), public authorities have also an important role to play in the adaptation of the private public-service provision over time. This paper studies how the contractual design of PPPs affects accountability and incentives for contractually unanticipated service adaptations. More specifically, we observe worldwide two main different contracting out procedures: the concession contract and the availability contract. The main difference between these two contractual practices concerns the demand risk, which is borne by private providers in the first case and by public authorities in the second case. This paper shows that there are two main effects of the contractual design on accountability. (1) Concession contracts, compared to availability contracts, motivate more public authorities from investigating and responding to public demands. This is due to the fact that under a concession contract consumers are empowered, i.e. have the possibility to oust the private provider, which provides public authorities with more credibility in side-trading. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts, since, if private providers bear the demand risk, they can receive private gains from implementing the adaptation. The striking policy implication of this paper is then that the trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal in terms of allocative efficiency

Contractual flexibility or rigidity for public private partnerships? Theory and evidence from infrastructure concession contracts

In this article, we explore the contractual design of toll infrastructure concession contracts. We highlight the fact that the contracting parties try to sign not only complete rigid contracts in order to avoid renegotiations but also flexible contracts in order to adapt contractual framework to unanticipated contingencies and to create incentives for cooperative behavior. This gives rise to multiple toll adjustment provisions and to a tradeoff between rigid and flexible contracts. Such tradeoff is formalized with an incomplete contract framework, including ex post maladaptation and renegotiation costs. Our model highlights the fact that trade-offs are complex and do not correspond to previous propositions coming from a transaction cost framework. More precisely, those previous works argue that a rigid contract is to be preferred as soon as specific assets are high. We highlight the fact that this proposition may be true, but only if other conditions concerning maladaptation costs, renegotiation costs and the probability to see the contract enforced are met. Furthermore, our results stress the fact that the institutional environment in which the contract is embedded matters. Propositions are tested using an original database of 71 concession contracts. Our results suggest an important role for economic efficiency concerns, as well as politics, in designing toll road concession contracts. In this perspective, our work complements other empirical studies on contractual price provisions (Masten-Crocker 1991, Crocker-Reynolds 1993, Bajari-Tadelis 2001, Bajari & al 2006), by considering the case of public-private contracting, as well as other studies on public-private partnerships, by focusing on toll adjustment provisions and documenting the effect of reputation and political ideology

The more the merrier? Number of bidders, information dispersion, renegotiation and winner’s curse in toll road concessions

We empirically assess the winner’s curse effect in auctions for toll road concessions. First, we investigate the overall winner’s curse effects on bidding behaviour. Second, we account for differing levels of common-value components. Third, we investigate whether the possibility of renegotiation affects the winner’s curse effect. Using a unique dataset of 49 concessions, we show that the winner’s curse effect is particularly strong, i.e. bidders bid less aggressively when they expect more competition. In addition, we observe that this effect is larger for projects where the common uncertainty is greater, and is dampened in weaker institutional frameworks, in which renegotiations are easier

The more the merrier? Number of bidders, information dispersion, renegotiation and winner’s curse in toll road concessions

We empirically assess the winner’s curse effect in auctions for toll road concessions. First, we investigate the overall winner’s curse effects on bidding behaviour. Second, we account for differing levels of common-value components. Third, we investigate whether the possibility of renegotiation affects the winner’s curse effect. Using a unique dataset of 49 concessions, we show that the winner’s curse effect is particularly strong, i.e. bidders bid less aggressively when they expect more competition. In addition, we observe that this effect is larger for projects where the common uncertainty is greater, and is dampened in weaker institutional frameworks, in which renegotiations are easier

The more the merrier? Number of bidders, information dispersion, renegotiation and winner’s curse in toll road concessions

We empirically assess the winner’s curse effect in auctions for toll road concessions. First, we investigate the overall winner’s curse effects on bidding behaviour. Second, we account for differing levels of common-value components. Third, we investigate whether the possibility of renegotiation affects the winner’s curse effect. Using a unique dataset of 49 concessions, we show that the winner’s curse effect is particularly strong, i.e. bidders bid less aggressively when they expect more competition. In addition, we observe that this effect is larger for projects where the common uncertainty is greater, and is dampened in weaker institutional frameworks, in which renegotiations are easier

The Legacy of the Slave Trade: Towards Identifying the Causal Impact of Mistrust in Medicine on Demand for Vaccination in Sub-Saharan Africa

There is a large body of anecdotal evidence from sub-Saharan Africa of widespread medical distrust leading to health program failures. In this paper, to isolate an exogenous variation in trust in medicine to explain contemporary health demand in sub-Saharan Africa, we rely on a widespread historical shock: the slave trade. We combine \possessivecite{NunnWantchekon2011} historical data on the slave trade by ethnic group with individual-level data, geolocated at the district level, from the 2010-2014 Demographic and Health Surveys (DHS) to examine the reduced-form relationship between ancestors’ exposure to the slave trade and children vaccination status against measles. Exploiting variations both within countries and districts, we find that children from mothers whose ancestors were exposed to the slave trade are less likely to be vaccinated. The size of the effect offsets or even dominates the ones obtained for standard determinants of health demand, such as education or revenue. Evidence from a variety of identification strategies shows that the slave trade affects demand for vaccination only through trust in medicine. We then provide explanations for the persistent effect of the slave trade. Consistent with the economic approach, we identify religious affiliations and matrilineal lineage systems as important cultural transmission mechanisms. Consistent with the evolutionary anthropology approach, we point to the similarity of the environment across generations due to colonial and contemporaneous abusive medical treatments to explain persistence of optimal mistrusting behavior