HSE Seminar on Political Economy: David Martimort (Paris School of Economics) about the social welfare and the relationships between the government and operators

The relationships between the government and operators are regulated by a contract. In theory such contracts offer a choice among a continuum of options, but due to the complexity, it is impossible to realize them. Therefore the government usually offers a contract with just two alternatives, for instance, a fixed-price or a cost-plus one. However, using such binary contracts instead of the ones obtained in theory leads to a sufficient decrease in social welfare. On the presentation of the article «Full versus binary menus: What are the welfare gains?» the professor of Paris School of Economics David Martimort told us how, actually, big the loss of the society is.

Topic: "Full versus binary menus: What are the welfare gains?"

Abstract:
This study focuses on the contractual relationships between public authorities and operators. The new theory of regulation suggests that, in a situation of asymmetric information, the principal may propose the agent a complex menu of linear contracts in order to maximize social welfare. While this practice is well understood from a theoretical point of view, it is di fficult to implement in practice; instead, simple binary menus are frequently used in reality. Rogerson (2003) and Chu and Sappington (2007) have suggested through a theoretical exercise that simple binary menus capture a substantial share of the gains achievable by the full optimal menu (at least 75%). A  first goal of our paper is to challenge these results empirically in the particular case of the local public sector. Our preliminary results are much more pessimistic than those obtained by these authors. As a by-product, we investigate whether the major source of bene fit in contract design comes either from better designing cost reimbursement rules or extending contract length.

the joint seminar of Higher School of Economics on political economy, International Center for the Study of Institutions and Development (ICSID) and NES Center for the Study of Diversity and Social Interaction was held May 16.