Working Paper: CEPR ID: DP10110
Authors: Patrick W. Schmitz
Abstract: Consider a non-governmental organization (NGO) that can invest in a public good. Should the government or the NGO own the public project? In an incomplete contracting framework with split-the-difference bargaining, Besley and Ghatak (2001) argue that the party who values the public good most should be the owner. We demonstrate the robustness of their insight when the split-the-difference rule is replaced by the deal-me-out solution. Our finding is in contrast to the private good results of Chiu (1998) and De Meza and Lockwood (1998), who show that the optimal ownership structure crucially depends on whether the split-the-difference rule or the deal-me-out solution is used.
Keywords: bargaining; incomplete contracts; investment incentives; ownership; public goods
JEL Codes: C78; D23; D86; H41; L31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Party who values the public good most (D72) | Ownership of the public good (H13) |
| Deal-me-out solution (C78) | Party with highest valuation maintains ownership (G32) |
| NGO as residual claimant under deal-me-out rule (G33) | No first-best investment incentives (H21) |
| Public goods context (H41) | Different optimal ownership compared to private goods (H42) |