Daniel Danau

From fixed to state-dependent duration in public-private partnerships: DANAU AND VINELLA

A government delegates a build-operate-transfer project to a private OIˆrm. In the contracting stage, the operating cost is unknown. The OIˆrm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly e§ort when building the infrastructure. Once this is in place, the OIˆrm learns the true cost and begins to operate. We show that, under limited commitment, if the break-up of the partnership is su¢ciently costly to the government and/or information problems are su¢ciently severe, the contract is not robust to renegotiation unless it has a longer duration when the realized cost is low. This result is at odds with the prescription of the literature on aI exible-term contracts, which recommends a longer duration when operating conditions are unfavourable.

Sequential Screening and the Relationship between Principal's Preferences and Agent's Incentives

In sequential screening problems it is found that, under some regularity conditions, local incentive compatibility constraints are sufficient for implementability. However, this follows from the assumption that the possible distributions of the unknown variable satisfy either first-order stochastic dominance or mean-preserving spread. That assumption is matched with private information about either the expected value or the spread of the variable. In this paper we allow for private information about both parameters. In a setting with four possible cost distributions, two with equal expected values and different spreads and two with different expected values and equal spreads, we show that there can be multiple combinations of binding incentive constraints depending on the principals preferences. The less concave / more convex that the marginal surplus is, the more that the binding incentive constraints are related to private information about one parameter of the distribution relative to the other. Yet, screening is always two-dimensional. Local incentive constraints are sufficient, as in the literature, only when the marginal surplus is sufficiently convex. We further suggest that, in the same vein as in Consumption theory, the contractual choice can be regarded as mirroring the preference of the decision-maker for a lottery that occasions a higher (certain) cost but grants the possibility of facing more efficient (random) outcomes. Resting on this interpretation, we assess that the benefit of screening the agent in two stages, rather than in the contracting stage only, is higher when the marginal surplus is less concave / more convex.

From fixed to state-dependent duration in public-private partnerships

A government delegates a build-operate-transfer project to a private firm. In the contracting stage, the operating cost is unknown. The firm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly effort when building the infrastructure. Once this is in place, the firm learns the true cost and begins to operate. We show that, under limited commitment, if the break-up of the partnership is sufficiently costly to the government and/or information problems are sufficiently severe, the contract is not robust to renegotiation unless it has a longer duration when the realized cost is low. This result is at odds with the prescription of the literature on flexible-term contracts, which recommends a longer duration when operating conditions are unfavourable.