Public-private Partnerships and the Allocation of Demand Risk - an Incomplete Contract Theory Approach
Abstract: In this paper, we explore the consequences of the allocation of demand risk in public-private contractual agreements, for infrastructure-based public services. Using an incomplete contract framework, our results show that when the operator bears the demand risk, he gets higher incentives to increase the quality of the service, but this may lead to exclude some citizens from accessing the service. When the demand risk is borne by the public authority, more citizens can access the service but the operator gets lower incentives to innovate and to care for quality. There is then a trade-off between economic performance of a service and equity concern, as regards to access the public service. Social rules that prevail in a society may in fluence the choice between these two types of contracts.
