Optimal contract with moral hazard for public private partnerships

DOI10.1080/17442508.2017.1303068zbMATH Open1395.91279arXiv1703.01754OpenAlexW2594616249MaRDI QIDQ4584683FDOQ4584683

Caroline Hillairet, Ishak Hajjej, Mohamed Mnif, Monique Pontier

Publication date: 4 September 2018

Published in: Stochastics (Search for Journal in Brave)

Abstract: Public-Private Partnership (PPP) is a contract between a public entity and a consortium, in which the public outsources the construction and the maintenance of an equipment (hospital, university, prison...). One drawback of this contract is that the public may not be able to observe the effort of the consortium but only its impact on the social welfare of the project. We aim to characterize the optimal contract for a PPP in this setting of asymmetric information between the two parties. This leads to a stochastic control under partial information and it is also related to principal-agent problems with moral hazard. Considering a wider set of information for the public and using martingale arguments in the spirit of Sannikov, the optimization problem can be reduced to a standard stochastic control problem, that is solved numerically. We then prove that for the optimal contract, the effort of the consortium is explicitly characterized. In particular, it is shown that the optimal rent is not a linear function of the effort, contrary to some models of the economic literature on PPP contracts.

Full work available at URL: https://arxiv.org/abs/1703.01754

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zbMATH Keywords

HJB equationmoral hazardstochastic control under partial informationpublic private partnership

Mathematics Subject Classification ID

Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

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Cited In (2)

• Optimal contracts with public ex post information
• Optimal stopping contract for public private partnerships under moral hazard

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