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.     

Determinants of adaptation costs in procurement: an empirical estimation on Italian public works contracts

It is widely agreed that rules governing public procurement should be designed to achieve value for money. However, in the public works sector, ‘…?the good being procured is usually complex and hard to be exactly specified ex ante, …?[and] alterations to the original project might be needed after the contract is awarded. This may result in considerable discrepancies between the lowest winning bid and the actual costs that are incurred by the buyer’ (Bajari et al., 2006). There is now a wide body of literature focusing on cost escalation during the execution of contracts and their estimates reveal that it can be often quite large. This article is aimed at offering an empirical test of the determinants of adaptation costs in the public works procurement. Using a detailed data set on Italian public works contracts, we run an empirical analysis, grounded on the main conclusions reached in the literature, to test for the main drivers of adaptation costs.     

LONG‐TERM AND SHORT‐TERM CONTRACT IN A MIXED MARKET*

With a two‐period mixed oligopolistic framework, this paper analyses the interaction between the length of incentive contracts and market behaviour. Assuming an environment in which firms choose either a long‐term or short‐term contract, we examine how contracts differ between public and private firms. The results show that the contracts would differ completely among firms; public firm prefers to make a short‐term contract while private firm makes a long‐term contract.     

Endogenous Choice of Strategic Contracts in a Mixed Duopoly with Bargaining Over Managerial Delegation Contracts

We revisit the endogenous choice problem of strategic contracts for the public firm and the private firm in a managerial mixed duopoly with differentiated goods. We consider the situation wherein the managerial delegation contracts are determined by maximising social welfare within the public firm, which is equal to the objective function of its owner, and through bargaining over the content of managerial delegation contracts between the owner and manager within the private firm. We show that, in equilibrium, when the manager of the private firm has high bargaining power relative to that of the owner, the public firm chooses a price contract, while the private firm chooses a quantity contract. However, there is no equilibrium market structure under the pure strategic contract class when the manager has sufficiently low bargaining power relative to that of the owner.     

Communication,competition and social gift exchange in an auction for public good provision

Reverse auctions are an established policy instrument for allocating conservation contracts. While the auction mechanism has been the subject of a number of studies, less attention has been paid to the post-bidding contract phase. As contracts involving natural resource management are usually incomplete, trust becomes crucial for the effectiveness of the programme. We test the effect of communication between auctioneer and bidders on bidding behaviour and contract fulfilment using experimental economics. We combine a repeated reverse auction with an effort-level game and use a bilateral chatting tool as treatment variable. Without communication, auctioneers tended to select the lowest-priced bidders, who invested substantially less than the socially optimal level of effort when fulfilling their contract to provide the public good. Relational contracting proved important, with effort levels and profits tending to be higher when auctioneers and bidders entered into consecutive contract relationships. In the communication treatment there was no evidence of price competition, as auctioneers were more likely to accept high-priced bids. However, an overall higher price level did not lead to efficiency losses, since contractors realised higher effort levels in return, establishing a ‘social gift exchange’. Our results demonstrate the importance of trust-based relationships between the auctioneering institution and landholders.     

BUILDING SOCIAL CAPITAL FOR SOCIAL ENTREPRENEURSHIP

ABSTRACT: By entrepreneurial combinations of voluntary resources, project means from public and private sources, commissions on contracts and other ways of financing, the youth house Fryshuset, with a great number of social activities for primarily young people in Stockholm, Sweden, has been able to allocate resources for establishing and expanding its activities. This development would not have been possible without struggle against established norms, values, traditions and institutions, not least the ‘close to monopoly’ that the public sector in practice was having on the fields in which Fryshuset emerged. Step by step, Fryshuset has built partnerships and alliances with public, private as well as civil actors. Expressed in a general way, Fryshuset has built a new social capital and created new norms and values. The aim of the paper is to investigate how Fryshuset has managed to build social capital through, and for entrepreneurial efforts aiming to facilitate young peoples’ development.     

London bus tendering: the impact on costs

Bids for cost contracts in London Regional Transport bus routes between 1986 and 1993 are analysed for three purposes: to estimate costs for different types of bus operation; to test hypotheses about bidding under competition; to estimate cost savings attributable to tendering. There is no statistically significant difference in costs of operation between public and private sector operators on the tendered network. Bidding behaviour conforms to some features predicted by theoretical models. The estimated cost saving from tendering is 20%.     

PRICE AND QUANTITY COMPETITION WITH ASYMMETRIC COSTS IN A MIXED DUOPOLY: A TECHNICAL NOTE

We consider a mixed duopoly in which private and public firms can choose to strategically set prices or quantities when the public firm is less efficient than the private firm. Thus, even with cost asymmetry, we obtain exactly the same result (i.e., Bertrand competition) of Matsumura and Ogawa (2012) if Singh and Vives’ (1984) assumption of positive primary outputs holds. However, compared to endogenous determination of the type of contract without cost asymmetry, our main finding is that in the wider range of cost asymmetry, different type(s) of equilibrium related to or not related to the limit‐pricing strategy of the private firm can be sustained. Thus, when considering an implication on privatization, we may overestimate the welfare gain of privatization because Cournot competition takes place after privatization even though cost asymmetry exists between firms. While the result of Matsumura and Ogawa (2012) holds true if the goods are complements, we find the novel results in the case of substitutes.     

PUBLIC VERSUS PRIVATE DELIVERY OF MUNICIPAL SOLID WASTE SERVICES: THE CASE OF NORTH CAROLINA

This paper examines the effects of different institutional arrangements and characteristics on cost savings, efficiency gains, and productivity of delivering municipal solid waste services. A cost function approach is employed, and North Carolina municipal data for three years (1997, 2001, and 2003) are used for the analysis. Empirical findings indicate that there is no significant difference in cost savings between public delivery and private contractor delivery of solid waste services, a finding similar to those of other recent studies. There are three possible reasons for this. First, the threat of competition and contracting out might have led to cost savings in the cases of public delivery. Second, there might be a lack of competition because a few large private contractors have been able to win follow‐on contracts over the years. Third, there might be substantial transaction costs arising as the result of private contracting. (JEL H40, H83, Q53)     

On the comparison of Schwartz and Smith’s two- and three-factor models on commodity prices

Since Schwartz and Smith (2000) published their study on two-factor model on commodity prices, many studies have used this model and others have extended it. The authors also proposed the three-factor model due to the poor fitting of the two-factor one on long-term futures prices. At that time the authors had only long-term prices from a private source to calibrate, test and compare these models. No public data on long-term future contracts were available. On the other hand, during the last decade the commodity prices soared as did the liquidity of long-term contracts. This means that the interest of the agents in the management of their risk on long-term positions increased the same way and this is the motivation for this study. In this article, we revisit the comparison between two- and three-factor models using public data for short- and long-term contracts (we use up to the 67-month-ahead contract). We also provide a detailed derivation of the three-factor model differently from that of the original article. Following the original article of Schwartz and Smith, we used oil futures prices traded on the New York Mercantile Exchange to calibrate the model. The results show a better fit of the three-factor model for the term structure of prices and volatilities mainly for long maturities contracts, while the two-factor model in most portions of the curve underestimates the risk premiums. This type of analysis is important not only for daily agents negotiating the physical commodities through long-term contracts but also for investment decisions on development of real projects.     

Games played in a contracting environment

We analyze normal form games where a player has to pay a price to a supplier in order to play a specific action. Our focus is on supplier competition, arising from the fact that distinct suppliers supply different players, and possibly different actions of the same player. With private contracts, where a player only observes the prices quoted by his own suppliers, the set of equilibrium distributions over player actions coincides with the set of equilibrium distributions when all actions are supplied competitively, at cost. With public contracts, the two distributions differ dramatically even in simple games.     

Games played in a contracting environment

We analyze normal form games where a player has to pay a price to a supplier in order to play a specific action. Our focus is on supplier competition, arising from the fact that distinct suppliers supply different players, and possibly different actions of the same player. With private contracts, where a player only observes the prices quoted by his own suppliers, the set of equilibrium distributions over player actions coincides with the set of equilibrium distributions when all actions are supplied competitively, at cost. With public contracts, the two distributions differ dramatically even in simple games.     

The Impact of Biotechnology Pervasiveness and User Heterogeneity on the Organization of Public Sector Research

This paper examines aspects of the contractual relationship between the principal actors in the construction of the Channel Tunnel. Based on interviews with key participants and a wealth of public and semi-public documentary data, the paper presents a case study illustrating the interconnect-edness of contractual form, process and trust, and the management and performance of complex, large-scale technological projects. Theoretically, the research is informed by, a cross-disciplinary approach, taking in contributions to the management of complexig and interrfirm relationships associated with the markets and hierarchies debate in economics and in organization theory, and research on the management of scale from the technology policy and project management literatures. More specifically, the paper builds upon Stinchcombe's findings that:(a) contrary to the Williamsonian view contracts between firms are employed in the practice of administering complex undertakings (i.e. rather than ‘hierarchy’ but (b) to enable such contracting to perform effectively, ‘hierarchical’features are devised by the parties in a bid to ‘structure’ their joint ‘incompetence’ at managing the unknowns and unknowables of complex projects, and of selecting appropriate contract forms, In the case of the Channel Tunnel development, the nature of the various contractual arrangements is described. An evaluation of the extent and qua&; of hierarchical aspects o f the contractual relationship between Eurotunnel, TML (the principal constructing contractor), financial, governmental and other organizations is conducted. This is carried out in terms of the ease or diffculty experienced in managing changes in design specfication, monitoring work that was executed or resoluing disputes over the interpretation of contractor performance criteria, for example. Ultimately, the paper points up the extent to which differing expecta-tions from the project, adversarial contractual relations and lack of trust between the client and the main contractor (against a background of ‘fast track development’ contributed to problems of cost-effectively designing, constructing and coordinating Channel Tunnel technology. The conclusions serve to indicate how and why hierarchical elements of contracts may exacerbate ‘incompetence’ in the management of complex or large-scale technology projects, rather than ‘structure’ it, to the detriment Of overall project performance.     

Competition Among Italian Junior‐Secondary Schools: A Variance‐Decomposition Empirical Analysis

The public economic theory emphasizes the potential role of competition in fostering the performance of educational systems. The rationale for pro‐competitive policies in education (i.e. vouchers, charter schools, tax deductions) is that schools can improve their quality responding to ‘pressures’ from nearby competitors. The objective of this paper is to analyze the potential relationship between (i) competition among schools and (ii) students’ achievement in Italy. While previous studies used OECD‐Pisa data for this purpose, here a new dataset about Italian schools has been employed: about 19,000 students in 150 schools constitute the sample. The reference framework is the idea that the presence of more schools in a certain area, and/or the proportion of students enrolled in private schools, should raise the performance of schools operating in that area through a ‘competition effect’. A multilevel strategy, which allows separating between‐areas variance in achievement scores, is employed. The findings support the view that competition has an impact, albeit little, on students’ achievement, and such competitive pressure is due to the number of schools, no matter if public or private.     

Price or Quantity? A New Irrelevance Result for Mixed Markets

Earlier studies for mixed markets have established a series of so‐called irrelevance results. While previous results relate to the attainment of the first‐best allocation for welfare, we provide a new irrelevance result in terms of the choice of strategic variable in the product market. We show that regardless of whether a public or private firm is the market leader, the leader always chooses the price contract whereas the follower is indifferent between the price contract and the quantity contract. The identity of the leader and the follower firm is therefore irrelevant for the equilibrium mode of competition. Implications for economic models in mixed market settings emerge, which are also discussed.     

A transaction cost model of contract choice: The case of petroleum exploration

The growing literature on transaction costs posits that the structures of contracts involving exchange under uncertainty are influenced by the costs incurred by the contracting parties prior to, as well as after, a contract is signed. This research investigates the contractual responses to the substantial uncertainty attending the exchange of rights to underground petroleum deposits. It develops a transaction cost model to explain the payment structure found in these contracts. The model identifies the major transaction costs associated with the payment types used in oil and gas exploration contracts, including ex ante measurement costs and ex post production inefficiencies, and explains their effect on contract structure. Testable implications concerning variations in the payment structure of petroleum exploration contracts are generated and tested using data from private oil and gas mineral rights leasing contracts in four western states. The study has direct public policy significance in that it delineates the implications of different payment structures of oil and gas leasing contracts. These implications can be used to evaluate proposals to reform federal oil and gas leasing policies. In addition, while there has been considerable analysis of federal offshore oil and gas leasing contracts, there has been a dearth of research on private onshore oil leasing practices. This study helps to fill this empirical void.     

NONSTATIONARY RELATIONAL CONTRACTS WITH ADVERSE SELECTION*

I develop a model of nonstationary relational contracts in order to study internal wage dynamics. Workers are heterogeneous, and each worker’s ability is both private information and fixed for all time. Learning therefore occurs within employment relationships. The inferences, however, are confounded by moral hazard. Incentive provision is restricted by an inability to commit to long‐term contracts. Relational contracts, which must be self‐enforcing, must therefore be used. The wage dynamics in the optimal contract, which are pinned down by the tension between incentive provision and contractual enforcement, are intimately related to the learning effect.     

Opening up Public Services to Competition by Putting Them Out to Tender: An Evaluation

This article examines the effects of systematizing tendering procedures when awarding public service concessions. The opening up of the water supply industry to competition is used by way of illustration. Results show that arguments in favour of systematization are not robust when focusing solely on the expected benefits of the liberalization process. The peculiarities of the contract relationship in the delegation of public services, the mobilization of specific assets, and the long duration and incompleteness of the contracts invalidate this type of argument and expose public authorities to the opportunism of operators.
The efficiency of awarding public services concessions relies on cost–benefit analysis, taking into account sectoral aspects as well as specificities of the contracting organizations and structures.
The public service culture of these organizations is in this respect a key factor in the choice of efficient organizations since it conditions their ability to internalize the mission of fulfilling the public interest.     

Imperfect common knowledge and the information value of prices

Summary. When economic agents have diverse private information on the fundamentals of the economy, prices may serve as a poor aggregator of this private information. We examine the information value of prices in a monopolistic competition setting that has become standard in the New Keynesian macroeconomics literature. We show that public information has a disproportionate effect on agents’ decisions, crowds out private information, and thereby has the potential to degrade the information value of prices. This effect is strongest in an economy with keen price competition. Monetary policy must rely on less informative signals of the underlying cost conditions.Received: 6 November 2003, Revised: 19 November 2004 JEL Classification Numbers: E31, E32, E58.This paper supersedes the discussion in the first half of our longer paper that circulated under the title “Public and Private Information in Monetary Policy Models”. We thank Andy Filardo, Marvin Goodfriend, Nobu Kiyotaki, John Moore, Stephen Morris and Lars Svensson for advice and comments at various stages of the project, and to Herakles Polemarchakis, Roko Aliprantis and an anonymous referee for their helpful comments and guidance. The views are those of the authors and do not necessarily represent those of the BIS. The second author acknowledges support from the U.K. ESRC under grant RES 000220450. Correspondence to: H.S. Shin     

Backing out of private pension provision: lessons from Germany

Financing pensions in the EU is a challenge. Many EU countries introduced private pension schemes to compensate declining public pension levels due to reforms made necessary by demographic change. In 2001, Germany introduced the Riester pension. Ten years after introduction the prevalence rate of this voluntary private pension scheme approximates 37 %. However, numerous criticisms raise doubts that the market for Riester products is transparent. Using the 2010 German SAVE survey, this article investigates terminated and dormant Riester contracts on a household level for the first time. Respectively 14.5 and 12.5 % of households who own or have owned a Riester contract terminated or set dormant their contract. We find that around 45 % of terminated or dormant Riester contracts are caused at least partly by product-related reasons, which is significantly higher than for endowment life insurance contracts. The uptake of a new contract after a termination is more likely if a termination is product-related. Nevertheless, after a termination 73 % of households do not sign a new contract, which can have serious long-term consequences for old-age income. Households with low income, low financial wealth or low pension literacy are more likely to have terminated or dormant contracts. Low income and low financial wealth households also have the lowest prevalence rate of Riester contracts and are at higher risk of old-age poverty.