Signaling and the Design of Delegated Management Contracts for Public Utilities

Wilfried Sand-Zantman and David Martimort

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Abstract: This article analyzes the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf. Governments are privately informed about the quality of the facility while risk neutral contractors undertake a non-verifiable operating effort. The design of the contract signals the quality of the facility in such a way that the better this quality, the greater the share of operating risk kept by the government. This feature reduces the agent's marginal incentives, creating a trade-off between signaling and moral hazard. We provide extensions of our framework in several directions allowing for risk aversion on the agent's side, double moral hazard and political delegation. The model is supported by some stylized facts from the water industry.

Keywords: Private/Public Ownership; Informed Principal; Signaling; Moral Hazard; Delegated Management; Private/Public Ownership. (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (17)

Published in The RAND Journal of Economics, 2006

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Journal Article: Signalling and the design of delegated management contracts for public utilities (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00173938

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