IDEAS home Printed from https://ideas.repec.org/p/cgr/cgsser/02-02.html
   My bibliography  Save this paper

Public-private partnerships versus traditional procurement: An experimental investigation

Author

Listed:
  • Eva I. Hoppe

    (Department of Economics, University of Cologne)

  • David J. Kusterer

    (Department of Economics, University of Cologne)

  • Patrick W. Schmitz

    (Department of Economics, University of Cologne)

Abstract

A government agency wants an infrastructure-based public service to be provided. Our experimental study compares two different modes of provision. In a public-private partnership, the two tasks of building the infrastructure and operating it are delegated to one private contractor (a consortium), while under traditional procurement, these tasks are delegated to separate contractors. We find support for the theoretical prediction that, compared to traditional procurement, a public-private partnership provides stronger incentives to make cost-reducing investments (which may increase or decrease service quality). In two additional treatments, we study governance structures which explicitly take subcontracting within private consortia into account.

Suggested Citation

  • Eva I. Hoppe & David J. Kusterer & Patrick W. Schmitz, 2011. "Public-private partnerships versus traditional procurement: An experimental investigation," Cologne Graduate School Working Paper Series 02-02, Cologne Graduate School in Management, Economics and Social Sciences.
    • Handle: RePEc:cgr:cgsser:02-02
    as

    Download full text from publisher

    File URL: http://www.cgs.uni-koeln.de/fileadmin/wiso_fak/cgs/pdf/working_paper/cgswp_02-02.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cox, James C. & Isacc, R. Mark & Cech, Paula-Ann & Conn, David, 1996. "Moral Hazard and Adverse Selection in Procurement Contracting," Games and Economic Behavior, Elsevier, vol. 17(2), pages 147-176, December.
    2. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    5. Maria Bigoni & Giancarlo Spagnolo & Paola Valbonesi, 2010. "Sticks and Carrots in Procurement," "Marco Fanno" Working Papers 0105, Dipartimento di Scienze Economiche "Marco Fanno".
    6. Darrin Grimsey & Mervyn K. Lewis, 2004. "Public Private Partnerships," Books, Edward Elgar Publishing, number 2438.
    7. Maija Halonen-Akatwijuka & Evagelos Pafilis, 2009. "Reputation and Ownership of Public Goods," The Centre for Market and Public Organisation 09/211, The Centre for Market and Public Organisation, University of Bristol, UK.
    8. 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.
    9. John Bennett & Elisabetta Iossa, 2006. "Delegation of Contracting in the Private Provision of Public Services," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 75-92, September.
    10. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
    11. Bennett, John & Iossa, Elisabetta, 2006. "Building and managing facilities for public services," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2143-2160, November.
    12. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    13. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 56-74, March.
    14. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
    15. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages 69-76, March.
    16. Elisabetta Iossa & David Martimort, 2011. "The Theory of Incentives Applied to the Transport Sector," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 29, Edward Elgar Publishing.
    17. Francesconi, Marco & Muthoo, Abhinay, 2006. "Control Rights in Public-Private Partnerships," CEPR Discussion Papers 5733, C.E.P.R. Discussion Papers.
    18. Timothy Besley & Maitreesh Ghatak, 2001. "Government Versus Private Ownership of Public Goods," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1343-1372.
    19. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    20. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1127-1161.
    21. Patrick W. Schmitz, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 318-336, Summer.
    22. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    23. Takeshi Nishimura, 2011. "Incomplete Procurement Contracting with a Risk-Averse Agent," Global COE Hi-Stat Discussion Paper Series gd10-165, Institute of Economic Research, Hitotsubashi University.
    24. Eshien Chong & Freddy Huet & Stéphane Saussier, 2006. "Auctions, Ex Post Competition And Prices: The Efficiency Of Public‐Private Partnerships," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 521-554, December.
    25. Fehr, Ernst & Schmidt, Klaus M., 2006. "The Economics of Fairness, Reciprocity and Altruism - Experimental Evidence and New Theories," Handbook on the Economics of Giving, Reciprocity and Altruism, in: S. Kolm & Jean Mercier Ythier (ed.), Handbook of the Economics of Giving, Altruism and Reciprocity, edition 1, volume 1, chapter 8, pages 615-691, Elsevier.
    26. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    27. Eshien Chong & Freddy Huet & Stéphane Saussier & Faye Steiner, 2006. "Public-Private Partnerships and Prices: Evidence from Water Distribution in France," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 149-169, September.
    28. Werner Güth & Radosveta Ivanova‐Stenzel & Sabine Kröger, 2006. "Procurement Experiments With Unknown Costs Of Quality," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 133-148, June.
    29. Hoppe, Eva I. & Schmitz, Patrick W., 2010. "Public versus private ownership: Quantity contracts and the allocation of investment tasks," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 258-268, April.
    30. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 55-73, September.
    31. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    32. Chen, Bin R. & Chiu, Y. Stephen, 2010. "Public-private partnerships: Task interdependence and contractibility," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 591-603, November.
    33. Warwick McKibbin & Timo Henckel, 2010. "The Economics of Infrastructure in a Globalized World: Issues, Lessons and Future Challenges," CAMA Working Papers 2010-39, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 56-74, March.
    2. Eva I. Hoppe & Patrick W. Schmitz, 2021. "How (Not) to Foster Innovations in Public Infrastructure Projects," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(1), pages 238-266, January.
    3. Schmitz, Patrick W., 2015. "Government versus private ownership of public goods: The role of bargaining frictions," Journal of Public Economics, Elsevier, vol. 132(C), pages 23-31.
    4. 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.
    5. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, vol. 57(C), pages 108-117.
    6. Halonen-Akatwijuka, Maija, 2012. "Nature of human capital, technology and ownership of public goods," Journal of Public Economics, Elsevier, vol. 96(11), pages 939-945.
    7. Schmitz, Patrick W., 2023. "The proper scope of government reconsidered: Asymmetric information and incentive contracts," European Economic Review, Elsevier, vol. 157(C).
    8. Arshad Ali Javed & Patrick T.I. Lam & Albert P.C. Chan, 2014. "Change negotiation in public-private partnership projects through output specifications: an experimental approach based on game theory," Construction Management and Economics, Taylor & Francis Journals, vol. 32(4), pages 323-348, April.
    9. Ram Singh, 2018. "Public–private partnerships vs. traditional contracts for highways," Indian Economic Review, Springer, vol. 53(1), pages 29-63, December.
    10. Schmitz, Patrick W., 2021. "Optimal ownership of public goods under asymmetric information," Journal of Public Economics, Elsevier, vol. 198(C).
    11. Bin R. Chen & Y. Stephen Chiu, 2014. "Task Interdependence and Noncontractibility in Public-Good Provision," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 170(4), pages 731-748, December.
    12. Hoppe, Eva I. & Schmitz, Patrick W., 2010. "Public versus private ownership: Quantity contracts and the allocation of investment tasks," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 258-268, April.
    13. Mahavadi Dhanshyam & Samir K. Srivastava, 2021. "Governance structures for public infrastructure projects: Public–private management regimes, contractual forms and innovation," Construction Management and Economics, Taylor & Francis Journals, vol. 39(8), pages 652-668, August.
    14. Chen, Bin R. & Chiu, Y. Stephen, 2010. "Public-private partnerships: Task interdependence and contractibility," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 591-603, November.
    15. Schmitz, Patrick W., 2014. "Optimal ownership of public goods reconsidered," Economics Letters, Elsevier, vol. 125(1), pages 21-24.
    16. Li, Sanxi & Sun, Hailin & Yan, Jianye & Yu, Jun, 2015. "Bundling decisions in procurement auctions with sequential tasks," Journal of Public Economics, Elsevier, vol. 128(C), pages 96-106.
    17. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    18. Jean-Etienne de Bettignies & Thomas W. Ross, 2010. "The Economics of Public–Private Partnerships: Some Theoretical Contributions," Chapters, in: Graeme A. Hodge & Carsten Greve & Anthony E. Boardman (ed.), International Handbook on Public–Private Partnerships, chapter 7, Edward Elgar Publishing.
    19. Schmitz, Patrick W., 2013. "Incomplete contracts and optimal ownership of public goods," Economics Letters, Elsevier, vol. 118(1), pages 94-96.
    20. John Bennett & Elisabetta Iossa, 2010. "Contracting out public service provision to not-for-profit firms," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 784-802, October.

    More about this item

    Keywords

    experiment; incomplete contracts; procurement; public-private partnerships;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cgr:cgsser:02-02. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: David Kusterer (email available below). General contact details of provider: https://edirc.repec.org/data/cgkoede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.