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Incentives in Contracts for Public Sector Projects with Private Sector Participation

Author

Listed:
  • Renato E. Reside, Jr.

    (School of Economics, University of the Philippines Diliman)

Abstract

Optimal contracts are derived from a simple model where government guarantees two types of private investors participationg in infrastructure projects. With asymmetric information, investors are offered a pair of incentive-compatible contracts covering production, tariff, and guarantee coverage. Both contracts offer identical production quantities, but the contract designed for high risk investors offers over-insurance and tariff below marginal cost, while the contract designed for low risk investors offers under-insurance with tariff above marginal cost, while the contract designed for low risk investors offers under-insurance with tariff above marginal cost. This benchmark outcome may motivate solutions to adverse selection, incentive and risk-sharing problems in contracts involving private sector participation in infrastructure development projects in the Philippines.

Suggested Citation

  • Renato E. Reside, Jr., 2003. "Incentives in Contracts for Public Sector Projects with Private Sector Participation," UP School of Economics Discussion Papers 200306, University of the Philippines School of Economics.
    • Handle: RePEc:phs:dpaper:200306
    as

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    File URL: http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/31/26
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    More about this item

    Keywords

    Private sector participation; infrastructure; incentives; adverse selection;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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