Optimal Public Procurement Contracts Under a Soft Budget Constraint

Ville Mälkönen

No 464, Discussion Papers from VATT Institute for Economic Research

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

Keywords: PPP contracts; public investments; moral hazard; Public services; Julkiset palvelut; Effectiveness of public services; Julkisten palvelujen vaikuttavuus (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cta and nep-pbe
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