Economics at your fingertips  

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

Giuseppe Attanasi (), Kene Boun My (), Marco Buso and Anne Stenger

Journal of Public Economic Theory, 2020, vol. 22, issue 3, 769-820

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.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)

Related works:
Working Paper: Private investment with social benefits under uncertainty: The dark side of public financing (2020)
Working Paper: Private investment with social benefits under uncertainty: the dark side of public financing (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1097-3923

Access Statistics for this article

Journal of Public Economic Theory is currently edited by Rabah Amir, Gareth Myles and Myrna Wooders

More articles in Journal of Public Economic Theory from Association for Public Economic Theory Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

Page updated 2021-06-10
Handle: RePEc:bla:jpbect:v:22:y:2020:i:3:p:769-820