Trust and Public Private Partnerships

Abstract: Public private partnership (PPP) contracts are increasingly popular worldwide to provide public services. However, contrary to the majority of contractual relationships, reputation and sanction mechanisms are impossible for PPPs. This implies that trust, which can be considered as a measure of the belief that the other party will cooperate, is most needed to support cooperation in PPPs. We argue that the difference of trust towards public officials and private firms is the keystone for the development of PPPs. This paper aims at uncovering its causal effect, based on Algan and Cahuc (2010)'s inherited trust method, using panel data on PPPs in 18 OECD countries over 1994-2011. Potential channels are also investigated. Our results highlight that the difference of trust towards public officials and private firms turns out to explain a significant share of the differences in the development of PPPs, in terms of number as well as in terms of value: the higher the level of public trust relative to business trust, the smaller the propensity of countries to resort to PPPs. We show that this is not explained by an ideological bias towards “more” state, but by a self-selection story, where countries with higher level of public trust relative to business trust attract better public agents.