Institutions and Incentives
Papers (under construction)
"Default and renegotiation in PPP auctions"
(Flavio Menezes and Matthew Ryan)
Abstract: The winners of auctions for Public-Private Partnership (PPP) contracts, especially for major infrastructure projects such as highways, often enter financial distress, requiring the concession to either be reallocated or re-negotiated. We build a simple model to identify the causes and consequences of, and propose solutions to, such problems. In the model, firms bid toll charges for a fixed-term highway concession, with the lowest bid winning the auction. The winner builds and operates the highway for the fixed concession period. Each bidder has a privately known construction cost and there is common uncertainty regarding the level of demand that will result for the completed highway. Because it is costly for the Government to re-assign the concession, it is exposed to a 'hold-up' problem, which bidders can exploit through the strategic use of debt. Each firm chooses its financial structure to provide optimal insurance against downside demand risk: the credible threat of default is used to extort an additional transfer payment from the Government. We derive the optimal financial structure and equilibrium bidding behaviour and show that (i) the auction remains efficient, but (ii) bids are lower than they would be if all bidders were equity financed, and (iii) the more efficient the winning firm, the more likely it is to require a Government bail-out and the higher the expected transfer it extracts from the Government. We discuss potential resolutions of this problem, including the use of Least-Present-Value-of-Revenue (LPVR) auctions.
***Read more on PPPs in an article by Matthew Ryan on page 10 of Issue #40 of the ISCR Newsletter.***
"Truth-in-advertising laws and pharmaceutical promotion"
(Matthew Ryan and Rhema Vaithianathan)
Abstract: We analyse the regulation of direct-to-consumer advertising (DTCA) in the prescription drug market, where a regulator imposes a fine for misleading advertisements (truth-in-advertising regulation). The efficacy of a drug depends on its quality, based on scientific evidence, as well as on patient-specific characteristics. Patients do not possess information on either dimension of efficacy and rely on advice from doctors. Pharmaceutical firms observe the scientific data and use DTCA to convey this information to patients. Doctors observe both scientific data and patient-specific characteristics, and provide treatment recommendations. We develop a model in which a publicly observed advertising decision is followed by a doctor-patient signalling game. We show that in the presence of truth-in-advertising regulation, DTCA may increase both doctor-patient conflict and prescriptions for an expensive new drug. When DTCA is unregulated, it loses credibility and is not used in equilibrium. If freedom of speech issues prevent regulators from banning DTCA altogether, complete de-regulation might be a good mechanism for reducing its negative impact.
"Learning and collusion in new markets with uncertain entry costs"
(Francis Bloch, Simona Fabrizi and Steffen Lippert; Project funded by Marsden Grant)
Abstract: This paper analyzes an entry timing game with uncertain entry costs. Two firms receive costless signals about the cost of a new project and decide when to invest. We characterize the equilibrium of the investment timing game with private and public signals. We show that competition leads the two firms to invest too early and analyze collusion schemes whereby one firm prevents the other firm from entering the market. We show that, in the efficient collusion scheme, the active firm must transfer a large part of the surplus to the inactive firm in order to limit preemption.
"Corruption and the public display of wealth"
(Simona Fabrizi and Steffen Lippert)
Abstract: We develop a principal-agent-client model to show that public officials can facilitate corruption by means of conspicuous consumption if corruptors face uncertainty about their corruptibility. Within this model, we derive a signaling equilibrium in which officials with hard-to-monitor projects have incentives to facilitate their corruption by signaling their projects' type via public displays of wealth as long as their relative bargaining power vis-a'-vis potential corruptors is sufficiently high. We show that such public displays of wealth reduce society's expected payoff from public projects, so that there is a benefit to reducing the officials' bargaining power vis-a'-vis potential corruptors.
"Public debt and political distortions in developed economies: reconciling theory and evidence"
Abstract: This paper evaluates the effect of political distortions on the long-term levels of public debt in developed countries. Political distortions are measured by the public perception of the effectiveness of government, and are incorporated in a model of fiscal policy where a partially benevolent government diverts public resources and (due to this diversion) may not be re-elected. In the model, the government over-accumulates public debt in comparison to a government that presides over an economy without political distortions. Variations in the perceptions of political distortions help explain 70% of the variations in public debt levels across Western European countries and Western Offshoots.
"The dynamics of aid and political rights"
Abstract: Several existing papers explore the extent to which the cross-country variation in measures of democracy and political rights can be explained by the cross-country variation in foreign aid inflows. Using panel data, we explore the extent to which the variation over time in such measures can be explained by changes in aid inflows, thus providing direct evidence on the impact of innovations in donor policy, and distinguishing between the short-run and long-run effects of changes in aid. Our results are very different from those based on cross-country variation in aid inflows. We find evidence of large differences between the effect of aggregate aid and the effect of aid for political reform, and between the effects in countries at different stages of political development. There is no evidence that aid intended for political reform has achieved its objective, and in some countries it may be counter-productive. However, aggregate aid can have a beneficial effect on political rights.
Calls for papers
Special Issue on "Contract Theory" Edited by Tim Worrall (Edinburgh).
A special issue of "Games" (ISSN 2073-4336), an Open-Access Journal.
Topics: This special issue is intended to reflect the richness and variety of contract theory. Among the general topics of research to be considered are: 1) Relational contracts 2) Incomplete contracts 3) Limited enforcement 4) Financial and credit contracts.
Deadline for manuscript submissions: 1 April 2013.
Guest Editor: Tim Worrall, University of Edinburgh (E-Mail: Tim.Worrall@ed.ac.uk)
Find more information here.
Upcoming ISCR Conference on 'Public-Private Partnerships: Building Infrastructure for the Future', 28-29 August 2013
Venue: Old Government Buildings at the Pipitea Campus of Victoria University at Wellington.
Submission deadline: 1st May 2013.
The keynote speaker is: Ronald Fischer (University of Chile). For more info about the event visit the ISCR website.
selected ongoing research (under construction)
"Measuring legal and illegal corruption" (Project funded by University of Otago Research Grant to Oghuzan Dincer, Steffen Lippert and by Massey University Research Fund to Simona Fabrizi)
Recent studies suggest that because decision-makers either lobby or bribe, more lobbying leads to less bribery. However, if access to policy-makers is highly unequal, then, at the aggregate level, higher lobbying activity could also lead to more bribery, indicating that policy-makers regulating lobbying groups would benefit from research into the link between bribery and lobbying. Empirical studies so far have been limited by the non-existence of adequate data that are comparable across observational units. In this project, we collect adequate state-level data for the U.S., using these, to investigate the link between lobbying and bribery, and thereby to contribute to policy-making.