Jean-Etienne de Bettignies

The Economics of Public-Private Partnerships

Governments across Canada and around the world are looking for new ways to deliver public services at lower costs to taxpayers and users. Many have chosen to form public-private partnerships (P3s), involving the private sector to a much greater extent. This choice is often controversial, with the debates routinely driven by ideology more than careful analysis. This paper adds to the limited academic literature on P3s by reviewing the fundamental underlying economics of these relationships to get at their real costs and benefits. The goal is to help us better understand where and how P3s may be an efficient mechanism for the provision of public services.

Public-Private Partnerships and the Privatization of Financing: An Incomplete Contracts Approach

Governments have begun to embrace public-private partnerships (P3s) as vehicles for providing public services. This paper considers the controversial question of when private financing of public projects is optimal. Private development can dominate public financing through more efficient termination decisions for bad projects, resolving soft budget constraint problems. Due to contractual incompleteness and externalities, on the other hand, private developers cannot commit to large debt repayments, and hence can finance only a subset of valuable projects. Public developers, who do not face the same commitment problems, can finance a larger set of projects.

Corporate Venturing, allocation of talent, and competition for star managers

We provide new rationales for corporate venturing (CV), based on competition for talented managers. As returns to venturing increase, firms engage in CV for reasons other than capturing these returns. First, higher venturing returns increase managerial compensation, to which firms respond by increasing the power of incentives. Managers increase effort, prompting firms to reallocate them to new ventures, where the marginal product of effort is highest. Second, as returns to venturing become large, CV emerges as a way to recruit/retain managers who would otherwise choose alternative employment. We derive several testable empirical predictions about the determinants and structure of CV.We consider the motives for a firm to engage in corporate venturing. We argue that in case of failure of a new venture, corporate venture capitalists (CVC) have a strategic advantage relative to traditional venture capitalists (VC) in creating rents after rehiring or refinancing the entrepreneurs. Hence, corporate venturing induces the would-be entrepreneur to exert an effort that is higher than within the corporation, but lower than under traditional venture capital financing. Ceteris paribus, the entrepreneur ends up with fewer shares and less control under CVC financing than under traditional VC financing. Competition from venture capitalists increases corporate venturing activity, the salaries of potential entrepreneurs, and total economic output. Our results are consistent with the observed pro-cyclicality of corporate venture capital activity with venture capital activity.

Product Market Competition and Boundaries of the Firm

This paper studies the effects of product market competition on firm boundaries. In a duopoly setting, each retailer is associated with a manufacturer who must decide how to allocate property rights over a retail asset. Delegating property rights over the retail asset to an indepedent retailer (disintegration) transfers incentives from the manufacturer to the retailer and has the benefit of increasing product quality and profits, owing to the retailers superior efficiency. However, it also forces the manufacturer to forfeit part of the profits. Competition increases the net benefit from delegation and leads to more efficient, vertically disintegrated structures.

Venture capital investment: the role of predator–prey dynamics with learning by doing

This paper suggests that endogenous dynamics of the ‘predator–prey’ type can provide a contributing explanation for both high-venture capital concentration by industry and ‘boom and bust’ industry-level investment dynamics. We propose a model based on the idea that venture capitalists favor industries where they have significant experience and industries with a large pool of good investment opportunities. However, investment ‘uses up’ opportunities and therefore tends to deplete the pool of unexploited opportunities. The resulting industry-level interactive dynamics naturally give rise to venture capital investment cycles similar to observed patterns.

When Is Social Responsibility Socially Desirable

We study a model in which corporate social responsibility arises in response to inefficient regulation. In our model, firms, governments, and workers interact. Firms create negative spillovers that can be attenuated through government regulation, which is set endogenously and may not be socially optimal. Companies can hire socially responsible employees who enjoy correcting spillovers. Because firms can capture rents created by allowing this, they sometimes find it optimal to lobby for inefficient rules and then encourage socially responsible behavior in their midst. Thus, social responsibility can either increase or decrease social welfare, depending on the costs of political capture.

The Economics of Public-Private Partnerships: Some Theoretical Contributions

This chapter focuses on the economics of public-private partnerships (PPPs), and more specifically on important contributions made by economic theorists towards helping the understanding of where the PPP model will have its advantages and disadvantages relative to more traditional procurement models.

Product Market Competition and the Financing of New Ventures

This paper examines the interaction between venture risk, product market competition, and the entrepreneurs choice between bank financing and venture capital VC financing. Under bank financing, a debt-type contract emerges as optimal, which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives, as long as the entrepreneur can service the debt repayment; however, this leads to liquidation in the case of default, making the ventures success quite sensitive to exogenous, even temporary, shocks that may hinder debt repayment. Under VC financing, an equity-type contract emerges as optimal. Although it is not sensitive to exogenous shocks, this contract requires the entrepreneur to share a fraction of the rents with the financier, thus yielding lower effort incentives for the entrepreneur. There exists a threshold level of venture risk such that bank financing is optimal if and only if venture risk is below that threshold. Product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to VC financing. This is a robust result that is shown to hold in various models of competition, including the Hotelling, Salop, Dixit-Stiglitz, and Cournot-to-Bertrand switch. This paper was accepted by Lee Fleming, entrepreneurship and innovation.

Product Market Competition and Returns to Talent

This paper investigates how product market competition influences the wages paid to workers and the distribution of talent across industries. We develop a model where firms facing different competitive conditions bid for workers. The model predicts that wages are increasing in talent, decreasing in competition, and the interaction between talent and competition is positive. In addition, the most talented workers will be concentrated in competitive industries and talent dispersion rises with competition. We use linked employee–employer data to test these predictions.

Competition, Licensing, and Innovation Strategy

We study how competition between two downstream firms affects an upstream innovators innovation strategy, which includes selecting how much innovation to produce and whether to license this innovation to one (targeted licensing) or both (market-wide licensing) downstream competitors. Our model points to a U-shaped relationship between downstream competition and upstream innovation: at low levels of competition, market-wide licensing is optimal and competition reduces innovation, while at high levels of competition targeted licensing is optimal and competition increases innovation. Empirical analysis using a large panel of US data provides clear support for these predictions linking competition, innovation and licensing.