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Optimal Public Procurement Contracts Under a Soft Budget Constraint

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  • Mälkönen, Ville

Abstract

This paper presents a model where the central government cannot ensure that regional governments manage risks prudentially, due to soft budget constraint. Competition for project funding induces the regional governments use financial instruments as commitment devices as a signal of prudential risk management. A Public-Private Partnership contract, which delegates the monitoring task to a financial institute, is the most efficient commitment device provided that private financiers have an access to the same monitoring technology the regional governments fail to employ. The optimal capital structure of a PPP contract is a combination of public funds and debt from financial institutes. JEL Classification: D8, L3, H54, H57

Suggested Citation

  • Mälkönen, Ville, 2008. "Optimal Public Procurement Contracts Under a Soft Budget Constraint," Discussion Papers 464, VATT Institute for Economic Research.
    • Handle: RePEc:fer:dpaper:464
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    File URL: https://www.doria.fi/handle/10024/148454
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    References listed on IDEAS

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    More about this item

    Keywords

    PPP contracts; public investments; moral hazard; Public services; Julkiset palvelut; Effectiveness of public services; Julkisten palvelujen vaikuttavuus;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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