COLLUSION IN LOCAL PUBLIC WORKS

Martin Besfamille

International Economic Review, 2004, vol. 45, issue 4, 1193-1219

Abstract: A hierarchical model of collusion in local public works is presented. A local authority plans to undertake a project, delegating its construction to a construction firm. Both of them know the project's cost. However, the federal government decides whether to subsidize the project without knowing its cost. Therefore, the local authority and the constructor may agree to misreport their private information, in order to benefit from the allocation of federal grants. We show that different collusive behaviors may emerge. Then, we characterize the optimal federal grant policy. Finally, we investigate when constructing (shutting down) useless (valuable) projects is optimal. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2004
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