Counter-incentives in Incomplete Contracts
Abstract: We consider an incomplete contract relationship between a public authority and a private manager (Public Private Partnership), where parties can hold-up each other. We compare availability and concession contracts, the two more frequently used contractual designs for delegating public services to private operators, which di¤er in terms of allocation of demand risk (demand risk being on the private provider in a concession contract and on the public authority in an availability contract). Contrary to common wisdom, we show that contracting parties' efforts are lower when they bear demand risk. We also determine the proper choice of contractual design and the model is applied to understanding two famous highway concession and school catering availability contract case studies.