Corruption in PPPs, Incentives and Contract Incompleteness

David Martimort and Elisabetta Iossa

No 10925, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze risk allocation and contractual choices when public procurement is plagued with moral hazard, private information on exogenous shocks, and threat of corruption. Complete contracts entail state-contingent clauses that compensate the contractor for shocks unrelated to his own effort. By improving insurance, those contracts reduce the agency cost of moral hazard. When the contractor has private information on revenues shocks, verifying messages on shocks realizations is costly. Incomplete contracts do not specify state-contingent clauses, thereby saving on verifiability costs. This makes incomplete contracts attractive even though they entail greater agency costs. Because of private information on contracting costs, a public official may have discretion to choose whether to procure under a complete or an incomplete contract. When the public official is corrupt, such delegation results in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contracts are discussed.

Keywords: Corruption; Incomplete contracts; Moral hazard; Principal-agent-supervisor model; Public-private partnerships; Risk allocation (search for similar items in EconPapers)
JEL-codes: D23 D82 K42 L33 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-cta, nep-law, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP10925 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Corruption in PPPs, incentives and contract incompleteness (2016)
Working Paper: Corruption in PPPs, incentives and contract incompleteness (2016)
Working Paper: Corruption in PPPs, incentives and contract incompleteness (2016)
Working Paper: Corruption in PPPs, Incentives and Contract Incompleteness (2014)
Working Paper: Corruption in PPPs, Incentives and Contract Incompleteness (2014)
Working Paper: Corruption in PPPs, Incentives and Contract Incompleteness (2014)
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: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10925

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10925

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().