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.

Iossa, E., Martimort, D. (2016). Corruption in PPPs, incentives and contract incompleteness. INTERNATIONAL JOURNAL OF INDUSTRIAL ORGANIZATION, 44, 85-100 [10.1016/j.ijindorg.2015.10.007].

Corruption in PPPs, incentives and contract incompleteness

Iossa, Elisabetta
;
2016-01-01

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.
2016
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore SECS-P/01 - ECONOMIA POLITICA
English
Con Impact Factor ISI
Corruption Incomplete contracts Moral hazard Principal–agent–supervisor model Public–private partnerships Risk allocation
https://www.sciencedirect.com/science/article/pii/S0167718715001137
Iossa, E., Martimort, D. (2016). Corruption in PPPs, incentives and contract incompleteness. INTERNATIONAL JOURNAL OF INDUSTRIAL ORGANIZATION, 44, 85-100 [10.1016/j.ijindorg.2015.10.007].
Iossa, E; Martimort, D
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/204159
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