Control Allocation and Corruption in Public-private Partnerships

Abstract: Using the incomplete contract theory, we propose a model that explores the role of third parties to solve conflicts in public-private partnerships. In some cases, some third parties like arbitrators or judges can determine ex post whose party (public or private) gets the residual decision right. We consider contractual ambiguities or complexities that prevent full verifiability by the third party, and we also allow for bribery. We derive the conditions under which control allocation by a third party increases the efficiency of public-private partnerships. These results have direct consequences for the implementation of PPPs and for the Comparative Law and Economics.