How (Not) to Foster Innovations in Public Infrastructure Projects*

Abstract

The government wants an infrastructure‐based public service to be provided. First, the infrastructure has to be built; subsequently, it has to be operated. Should the government bundle the building and operating tasks in a public–private partnership? Or should it choose traditional procurement (i.e., delegate the tasks to different firms)? Each task entails unobservable investments to come up with innovations. It turns out that, depending on the nature of the innovations, bundling can either stimulate or discourage investments. Moreover, we find that if renegotiation cannot be prevented, public–private partnerships might lead the government to deliberately opt for technologically inferior projects.

The optimality of public–private partnerships under financial and fiscal constraints

“…Martimort and Straub (2016) develop a two‐stage moral hazard model where the second‐stage reward cannot depend on the first‐stage outcome, and the effort level must satisfy an irreversibility constraint such that it cannot be smaller in the second stage than in the first stage. Close to our setting, Hoppe and Schmitz (2021) do not consider any irreversibility constraint and allow for history‐dependent (or memory) contracts. Our contribution is characterized by important differences with respect to Hoppe and Schmitz (2021).…”

“…Close to our setting, Hoppe and Schmitz (2021) do not consider any irreversibility constraint and allow for history‐dependent (or memory) contracts. Our contribution is characterized by important differences with respect to Hoppe and Schmitz (2021). First, we do not consider any production externality between the two stages.…”

“…Hoppe and Schmitz (2021) already showed that partnership is better that sequential contracting when the firms' financial constraints do not differ between the two organizational forms. However, this paper highlights that such results may change when—for exogenous reasons—the contractors' wealth also depends on whether tasks are bundled or not.…”

“…However, if the risk-contagion effect is sufficiently strong such that bundling shrinks the agent's financial wealth, a stricter fiscal constraint may change the welfare ranking between the partnership and sequential contracts. Hoppe and Schmitz (2021) already showed that partnership is better that sequential contracting when the firms' financial constraints do not differ between the two organizational forms. However, this paper highlights that such results may change when-for exogenous reasons-the contractors' wealth also depends on whether tasks are bundled or not.…”

Universal High-Speed Broadband Provision: An Alternative Policy Approach

“…These issues are the focus ofHoppe and Schmitz (2021) andIossa and Martimort (2008).8 As a rule, we denote a random variable by a capital letter and its realization by a lower-case letter, such as V and v. 9 This should take care of an issue raised byNombela and De Rus (2004).…”