Buso M. (2014).

Public Private Partnerships: Information Externality in Sequential Investments (Revised). “Marco Fanno” working paper n. 176/2014.

Abstract:

This paper addresses the bene.ts of bundling two sequential activities in the context of public-private partnerships, (PPPs). Unlike previous literature, the paper introduces a source of asymmetric information in the form of an externality parameter that links the building stage with subsequent operational activity. Within this framework, PPPs allow the government to extract private information about the sign and magnitude of the externality parameter. On the other hand, bundling implies a higher degree of asymmetric information related to the operational stage than unbundling does when the contract is written. Our results indicate that PPPs can be commitment devices that force governments to de.ne ex-ante more coherent and informed plans, thereby improving investments and reducing unexpected cost overruns. Nevertheless, because of the presence of asymmetric information, bundling makes any cost-reducing e.ort suboptimal during the operational phase.