Research On Public-private Partnership(PPP) With Privately Informed Local Governments

This article considers the PPP contracts with privately informed local governments. On the one hand, Due to their own interests(such as easier to attract investment), the local government may report false prospect of project(such as better financial revenue and expenditure) to the potential investors(private sector), initiate the project whose actual value is lower than the value expected by the private sector. On the other hand, because the effort level is private information, the local government must take measures to supervise the effort level of the private sector.My results show that the local governments may design a contract which signals the quality of the project. The signaling contract will reduce the agent’s incentives. However, when the efficiency distortion brought by signaling is greater than the additional risk compensation needed in the pooling circumstances, a pooling contract is superior to the separating contract. Under pooling equilibrium, project with poor prospect( "bad project"), whose revenue is lower than its investment, may be implemented.When considering multiple periods PPP contracting, investment of a period will benefit more than one period later, there will be a "short-sighted" tendency in the designing of a long-term PPP contract when the project is a good project. The existence of substitution effect between various periods leads to further increase in short-term government incentive intensity and decreased long-term incentive intensity.Also, I discuss the incompleteness of the PPP contract. Invalid terms of the contract, the change in law and policy, and fuzziness of law would constitute government credit risk. These factors may narrow the scope of the optional PPP contract design, exacerbating opportunism tendency of local governments, resulting in reduced performance of PPP projects.