Corruption in PPPs, Incentives and Contract Incompleteness

Elisabetta Iossa, David Martimort
2014 Social Science Research Network  
In a public procurement setting, we discuss the desirability of completing contracts with state-contingent clauses providing for monetary compensations to the contractor when revenue shocks occur. Realized shocks are private information of the contractor and this creates agency costs of delegated service provision. Verifying the contractor's messages on the shocks entails contracting costs that make incomplete contracts attractive despite their higher agency costs. A public official
more » ... has private information on contracting costs and chooses the degree of contractual incompleteness on behalf of an upper-tier public authority. As the public official may be biased towards the contractor, delegating the contractual choice to that lower-tier may result in incomplete contracts being chosen too often; another source of agency costs. There exists a trade-off between the agency costs that pertain to different tiers of the regulatory hierarchy. As a result, it becomes optimal to leave less discretion to the public official and have complete and incomplete contracts with similar allocative consequences.
doi:10.2139/ssrn.2433467 fatcat:6l4yp5qs6fgdfe6ra5ogfkjl5e