Payoff Externality and Performance-Based Contracts for Transport Infrastructure

This paper examines the adverse selection and moral hazard issues of the performance-based contracts in transport infrastructure projects, which are caused by the pay-off externality between the contracts signed out in the different times and identified by the private agent monitoring. The adverse selection and moral hazard cannot be deterred by the penalty systems and competitive tendering, if the operation is carried out by a sequence of the individual short-term contracts. On the other hand, the adverse selection and moral hazard can be efficiently deterred by the long-term contracts with a single agent internalizing the pay-off externality, as far as the agent is bind to the contract throughout the contract periods. However, the efficiency of the long-term contracts is flawed if the breach of the contract is made by the agent. The paper also investigates the means to deter the strategic breaches of the agent.

Language

  • English

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Filing Info

  • Accession Number: 01601008
  • Record Type: Publication
  • Files: TRIS
  • Created Date: May 17 2016 1:18PM