Arm’s Length Provision of Public Services

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Arm’s Length Provision of Public Services

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Title: Arm’s Length Provision of Public Services
Author: Schultz, Christian; Bennedsen, Morten
Abstract: We analyze the economic consequences of strategic delegation of the right to decide between public or private provision of governmental service and/or the authority to negotiate and renegotiate with the chosen service provider. Our model encompass both bureaucratic delegation from a government to a privatization agency and electoral delegation from voters to a government. We identify two powerfull effects of delegation when contracts are incomplete: The incentive effect increases the incentive part of service providers’ remuneration and we show that strategic delegation may substitute formal incentive contracts. The bargaining effect improves the bargaining position vis a vis a private firm with market power and leads to a lower price for the service. Outsourcing, Strategic Delegation, Incentives, Incomplete Contracting, Market Power, Representative Democracy.
URI: http://hdl.handle.net/10398/7602
Date: 2007-12-05

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