Incentives in Contracts for Public Sector Projects with Private Sector Participation

Renato Reside

No 200306, UP School of Economics Discussion Papers from University of the Philippines School of Economics

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.

Keywords: Private sector participation; infrastructure; incentives; adverse selection (search for similar items in EconPapers)
JEL-codes: D81 D82 H54 H87 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-10
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Published as UPSE Discussion Paper No. 2003-06, October 2003

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Persistent link: https://EconPapers.repec.org/RePEc:phs:dpaper:200306

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