Working Paper

Government Outsourcing: Public Contracting with Private Monopoly

Emmanuelle Auriol, Pierre M. Picard
CESifo, Munich, 2006

CESifo Working Paper No. 1733

The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds. An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where government commits to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.

CESifo Category
Industrial Organisation
Keywords: privatization, soft-budget constraint, adverse selection, regulation, natural monopoly
JEL Classification: D820,L330,L430,L510