The Research on Bundling in Public-Private Partnership

In this paper we analyze whether the two tasks of building and operating infrastructures used for the provision of public services should be bundled or not, by studying the investment incentives which are the core of the bundling issue. We present a basic model in a multitask environment considering both productive efforts and unproductive efforts in quality improvement and cost reduction. We then explore how the payment mechanisms made by the government and the end users of the infrastructure affect the investment incentives of private firms. Finally, we conclude that in the incomplete contracts environment where the efforts the private sectors choose are noncontractible and unobservable, when there is a positive externality across construction stage and operation stage, bundling, with the private firms organized as a consortium, is always optimal in public-private partnerships (PPPs).