The Private Finance Initiative and Allocations of Inside Information: A Role of Debt Contract in Privatization(in Japanese)

1980s and 1990s are characterized by the wave of privatization. In Great Britain, France, and Japan, many state-owned enterprises have been privatized. There are many activities, however, that may not be suitable to be fully privatized. They face a common problem of how to modernize infrastructure and incentive structure in the presence of the public sector strong control. The Private Finance Initiative (PFI) is an attempt to resolve this problem by changing the basic model of public provision. We investigate the role of privatization from the standpoint of information structure. The privatization is thought of as an institutional device to restrict the government to have access to inside information about the firm. We also pay attentions to the role of debt contract in privatization so as to understand why the PFI usually accompanies project finance. The project finance is thought of as a device for the government to rescind/cancel the contract without having access to inside information about the firm. In the absence of the inside information, the government may rescind/cancel the contract of the project from the ex post point of view when the manager cannot meet his debt obligation. Under privatization, therefore, debt contract serves as a tool for the government to credibly threaten to rescind the contract if the quality of the good is low. This credible threat leads the manager to invest in quality improvement of the good in order to avoid the cancellation of the contract.