Arm’s Length Provision of Public Services

Morten Bennedsen and Christian Schultz ()
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Morten Bennedsen: Copenhagen Business School

No 2007-12, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: We analyze the economic consequences of strategic delegation of the right to decide between public or private provision of governmental service and/or the authority to negotiate and renegotiate with the chosen service provider. Our model encompass both bureaucratic delegation from a government to a privatization agency and electoral delegation from voters to a government. We identify two powerfull effects of delegation when contracts are incomplete: The incentive effect increases the incentive part of service providers’ remuneration and we show that strategic delegation may substitute formal incentive contracts. The bargaining effect improves the bargaining position vis a vis a private firm with market power and leads to a lower price for the service.

Keywords: outsourcing; strategic delegation; incentives; incomplete contracting; market power; representative democracy (search for similar items in EconPapers)
JEL-codes: D72 L33 L97 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2007-11
New Economics Papers: this item is included in nep-cdm and nep-pbe
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