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Public-Private Partnership Contractual Design: A Computational Model of the Moral Hazard with Lotteries

Author

Listed:
  • Rodrigo Nobre Fernandez

    (Universidade Federal de Pelotas)

  • Helton Saulo

    (Universidade Federal de Goiás)

  • André Carraro

    (Universidade Federal de Pelotas)

  • Fabricio Tourrucôo

    (Universidade Federal do Rio Grande do Sul)

  • Ronald Hillbrecht

    (Universidade Federal do Rio Grande do Sul)

Abstract

Public-Private Partnership (PPP) is a new model of public management which consists of the contractual relationship between public and private entities. In particular, PPPs enable risk share between public and private sectors making the asymmetric information problem in a contractual arrangement more evident. The aim of this paper was to study a moral hazard problem applied to PPP contracts. To achieve this objective, a PPP computational contractual model including the moral hazard with lotteries was developed to assess how contractual changes could affect the optimum behavior of arrangement members. Simulations indicate that projects with higher economic value should attract more qualified firms, which may be why the companies expend more effort. To deal with possible contractual contingencies and try to minimize the moral hazard problem, the government could draw up more flexible contracts in order to include possible necessary changes and punish unwanted or improper consortium behavior.

Suggested Citation

  • Rodrigo Nobre Fernandez & Helton Saulo & André Carraro & Fabricio Tourrucôo & Ronald Hillbrecht, 2018. "Public-Private Partnership Contractual Design: A Computational Model of the Moral Hazard with Lotteries," Public Organization Review, Springer, vol. 18(1), pages 39-51, March.
    • Handle: RePEc:kap:porgrv:v:18:y:2018:i:1:d:10.1007_s11115-016-0359-x
    DOI: 10.1007/s11115-016-0359-x
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    References listed on IDEAS

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    1. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    2. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    3. Roger Vickerman & Emil Evenhuis, 2010. "Transport Pricing and Public-Private Partnerships," Studies in Economics 1004, School of Economics, University of Kent.
    4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    5. Tahir Nisar, 2007. "Risk Management in Public–Private Partnership Contracts," Public Organization Review, Springer, vol. 7(1), pages 1-19, March.
    6. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    7. Evenhuis, Emil & Vickerman, Roger, 2010. "Transport pricing and Public-Private Partnerships in theory: Issues and Suggestions," Research in Transportation Economics, Elsevier, vol. 30(1), pages 6-14.
    8. repec:hal:pseose:hal-00813153 is not listed on IDEAS
    9. Kenneth L. Judd & Che-Lin Su, 2005. "Computation of Moral-Hazard Problems," Computing in Economics and Finance 2005 411, Society for Computational Economics.
    10. Edward Simpson Prescott, 1999. "A primer on moral-hazard models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-78.
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    Cited by:

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    2. Lima, Sónia & Brochado, Ana & Marques, Rui Cunha, 2021. "Public-private partnerships in the water sector: A review," Utilities Policy, Elsevier, vol. 69(C).

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