Managing Government Exposure to Private Infrastructure Risks

The privatization of infrastructure should lead to the developmentof new infrastructure, improvements in the operation of existinginfrastructure, and a reduction in budgetary subsidies. Whethercountries reap the full benefits of privatization, however,depends on how risks are allocated. If, as is often the casein developing countries, governments assume risks that shouldbe borne by investors, they may reduce incentives for efficiencyand incur significant liabilities. To solve these problems,governments need to improve their policies and restrict theirrisk bearing to certain political and regulatory risks overwhich they have direct control. When a government provides guarantees,it should attempt to measure their cost and improve the waythey are handled in the accounts and budgets. Measurement andbudgeting are critical to improving decisions about the provisionof guarantees, to improving project selection and contract design,and to protecting governments from unknowingly entering intocommitments that might jeopardize future budgets.      

Reputation from nested activities

Principals usually try to elicit the quality and behavior of agents from their performance. While sometimes success or failure in production does not provide accurate information about the agents, there may be activities not directly related to production that constitute a more precise signal. I show that, when agents face reputation concerns, introducing these activities after a success improves efficiency, while introducing them after a failure reduces efficiency. Hence, nesting activities in the right way may offer a cheap toolbox to provide incentives. As an illustration, I consider a model where reputation concerns drive the hiring decisions of managers in a firm and I show how scapegoating, an activity “nested” after failures in production, generates inefficiencies. While hiring efficient workers increases the probability of success, hiring less efficient workers provides a buffer against reputation loses from failures, since managers can blame them more easily.     

Regulatory design and technical efficiency: public transport in France

The provision of local public transport in France involves private and public firms and the use of incentive contracts to regulate them. We study the effect of these institutional features on the sector’s efficiency using a long panel data of firms, with a two-stage estimation procedure. First, we use nonparametric data envelopment analysis techniques to estimate input usage efficiency, following a conditional approach that controls for differences in the environments in which the firms operate. Second, we estimate semiparametric censored regressions, using fixed effects to control for unobserved sources of heterogeneity. Our results point to a differential effect of private and mixed public-private companies. In particular, having the performance of public operators as the benchmark, efficiency is relatively higher for private firms, but lower when the service is delegated to a mixed public-private firm. In the latter case, the effects diverge by contract type: when the contract is of the cost reimbursement type, performance is lower than the public firm benchmark, while for other contract types, there are no statistically significant differences.