Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks
13.02.2023
Marco Buso (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics – CRIEP); Cesare Dosi (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics – CRIEP); Michele Moretto (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics – CRIEP)
D81, D82, D86, H54
Public-private partnerships, Public franchises, Adverse selection, Dynamic contracts, Persistent demand shocks
In a continuous-time setting, we study the design of a dynamic contract between a government and a private entity, wherein the latter commits to pay the government in return for the exclusive right to sell a service by operating a public facility. Private revenues are modelled as depending on the unobservable ability to seize market opportunities and on imperfectly correlated changes in consumers’ preferences. We show that optimal regulation requires an appropriate combination of fixed and variable payments to the government, acting together both as an information revelation mechanism and as a risk sharing device.
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Citazione suggerita: M. Buso, C. Dosi, M. Moretto, ‘Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks’, Nota di Lavoro 03.2023, Milano, Italy: Fondazione Eni Enrico Mattei