Signalling and the design of delegated management contracts for public utilities
We analyze the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf. Governments are privately informed about the quality of the facility, while risk‐neutral contractors undertake a nonverifiable operating effort. The design of the contract signals the quality of the facility in such a way that the better this quality, the greater the share of operating risk kept by the government. This feature reduces the agent's marginal incentives, creating a tradeoff between signalling and moral hazard. We provide extensions of our framework in several directions, allowing for risk aversion on the agent's side, double moral hazard, and political delegation. The model is supported by some stylized facts from the water industry. Link to the article
MARTIMORT, D. and SAND-ZANTMAN, W. (2006). Signalling and the design of delegated management contracts for public utilities. RAND Journal of Economics, 37(4), pp. 763-782.