Government Outsourcing: Public Contracting with Private Monopoly", Economic Journal

Abstract: The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds a ̀ la Laffont and Tirole (1993). An alternative to regulation is proposed in which Þrms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private Þrms. This ex-post contracting set-up allows more ßexi-bility than traditional regulation where governments commits to both investment and operation cash-ßows. This is especially relevant in case of high technological uncertainties