nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒06‒14
three papers chosen by
Guillem Roig
University of Melbourne

  1. Contracting with Endogenously Incomplete Commitment: Escape Clauses By Tangerås, Thomas; Gick, Wolfgang
  2. When and How to Use Public-Private Partnerships in Infrastructure: Lessons from the International Experience By Eduardo Engel; Ronald Fischer; Alexander Galetivoc
  3. Public Private Partnerships in Britain: Interpreting Recent Experience By Foreman-Peck, James

  1. By: Tangerås, Thomas (Research Institute of Industrial Economics (IFN)); Gick, Wolfgang (Free University of Bozen/Bolzano, Italy)
    Abstract: We study mechanism design under endogenously incomplete commitment as it arises in contracting with escape clauses. An escape clause permits the agent to end a contractual relationship under specified circumstances, after which the principal can offer an ex-post contract. Escape clauses are valuable when the maximal number of initial contracts is smaller than the number of agent types. We identify a sufficient condition for incentive optimality of ex-post contracting. Escape clauses are always incentive optimal under severely constrained contracting. On the margin, the optimal escape clause balances the benefit of a better-adapted contract against an increase in dynamic inefficiency.
    Keywords: Constrained contracting; Escape clauses; Endogenously incomplete commitment; Ratchet effect; Revelation principle
    JEL: D82 D84 D86
    Date: 2021–05–28
  2. By: Eduardo Engel; Ronald Fischer; Alexander Galetivoc
    Abstract: In the last 30 years public-private partnerships (PPPs) have emerged as a new organizational form to provide public infrastructure. Governments find them attractive because PPPs can be used to avoid fiscal check-and-balances and increase spending. At the same time, PPPs can lead to important efficiency gains, especially for transportation infrastructure. These gains include better maintenance, reduced bureaucratic costs, and filtering white elephants. For these gains to materialize, it is necessary to set up a governance structure, that is more sophisticated than the governance of traditional infrastructure provision. The governance structure can be complemented by variable-term contracts that allocate demand risk efficiently, and by avoiding opportunistic renegotiations, which have been pervasive. The good news is that, based on the experience with PPPs over the last three decades, we have learnt how to cope with these challenges. Por aparecer en: Poterba, J. and Glaezer, E. (eds) "The Economics of Infrastructure Investment", MIT Press. Key words:
    Date: 2021
  3. By: Foreman-Peck, James (Cardiff Business School)
    Abstract: Britain was in the forefront of utilising Public-Private Partnerships (PPP) and contracting out from the 1980s. The British experience of increasing disenchantment with private finance and outsourcing in recent years is therefore of considerable interest. Private contractors have not proved invariably better at managing government services than direct government supply. Nearly complete measurement of the service is highly desirable if the supply is to be successfully contracted out or provided by a PPP. Though potentially beneficial for controlling project whole life costs, bundling different stages of supply boosts the size of the contract, which in turn reduces the number of potential competitors and the intensity of competition for the contract. Credible risk transfer continues to be challenging. H M Treasury project appraisal in some respects was biased in favour of private finance projects and yardstick competition between procurement routes remains underutilised. Private finance has been shown an expensive way of massaging the national debt-gdp ratio, although less than 10% of government investment is at stake. On the other hand, considerable experience has been obtained in controlling whole life project costs with other, simpler, procurement routes.
    Date: 2021–06

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