Government opportunism in public-private partnerships

Abstract

This paper analyzes the contracting out of public services through Public-Private Partnership (PPP) subject to government opportunism. In PPP, the building of public infrastructure and the provision of related services are procured through only one contract. On the one hand, such bundling of tasks provides incentives to invest in the infrastructure to minimize the cost of providing public services over the long-term. On the other hand, it creates incentives for the government to behave opportunistically, by not respecting the terms of the long-term contractual agreement. Contrarily, in the traditional procurement (TP), the public service provision tasks are contracted out separately. The purpose of this paper is two-fold. First, we show that government commitment not to engage in opportunistic behavior is the key factor determining the cost efficiency of PPP. Second, we specify the economic determinants of government's choice between PPP and TP under government opportunism.