Private investment with social benefits under uncertainty: The dark side of public financing

Giuseppe Attanasi, Kene Boun My (), Marco Buso and Anne Stenger ()
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Marco Buso: Unipd - Università degli Studi di Padova = University of Padua
Anne Stenger: BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We develop a game-theoretic model of private-public contribution to a long-term project with sequential actions and moral hazard. A private agent is one who is in charge of both the financial contribution and the management effort, these two actions entailing private costs and uncertain ex-post private and social benefits. A public agent is one who decides the amount of public funding to this quasi-public good, knowing that the size and the probability of attaining a surplus ex post depend on the private agent's effort. We consider four public-funding scenarios: benefit-sharing versus cost-sharing crossed with ex-ante versus ex-interim government intervention. We test our theoretical predictions by means of an experiment that confirms the main result of the model: Cost-sharing public intervention is more effective than benefit-sharing in boosting private financial contribution to the project. Furthermore, when public intervention comes after private contribution (ex-interim government intervention), both public-funding scenarios have a negative impact on the private management effort. In our model, the latter result is explained by the private agent's high degree of risk aversion. These results have policy implications for strategic investments with long-term social consequences. In deciding the optimal timing and method of the contribution, governments should also consider the indirect effects on agents' long-term management efforts.

Keywords: Private-public contribution; Public funding; Cost-sharing public intervention (search for similar items in EconPapers)
Date: 2020-06
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Citations: View citations in EconPapers (3)

Published in Journal of Public Economic Theory, 2020, 22 (3), pp.769-820. ⟨10.1111/jpet.12358⟩

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Journal Article: Private investment with social benefits under uncertainty: The dark side of public financing (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02893442

DOI: 10.1111/jpet.12358

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