Working Paper: CEPR ID: DP7056
Authors: Eva I. Hoppe; Patrick W. Schmitz
Abstract: The government wants a certain good or service to be provided. Should the required assets be publicly or privately owned or should a partnership be formed? Building on the incomplete contracting approach, we argue that the initially specified quantity of an ex ante describable basic good can have important effects on investment incentives, which has been neglected in the literature so far. We also study how the tasks of investing in quality improvements and cost reductions should be assigned. We show how the optimal contracts and governance structures depend on the exogenous parameters of the model such as the nature of the investments and the parties' bargaining powers.
Keywords: contractible; control; incomplete contracts; privatization
JEL Codes: D23; D86; H11; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ownership structure (G32) | investment incentives (O31) |
| private ownership (P14) | cost innovations (O39) |
| private ownership (P14) | underinvestment in quality improvements (L15) |
| public ownership (L32) | investment in quality improvements (L15) |
| public ownership (L32) | underinvestment in cost reductions (G31) |
| bargaining power (C79) | efficient investments in cost and quality (D61) |
| governance structure (G38) | patterns of investment (G11) |
| ownership structure (G32) | innovation outcomes (O36) |