Public–Private Mixed Delivery and Information Effects

Abstract

This paper analyses public–private mixed delivery of essential public services under price regulation. A private firm may have lower production costs and can potentially provide a performance benchmark for a public firm. A public firm may offer higher-quality service and can reveal the production cost of the private firm to the regulator. However, this paper shows that public–private mixed delivery does not always dominate public delivery or private delivery. Mixed delivery is optimal only when (i) the cost uncertainty of the private firm is large, (ii) the managerial incentive problem of the public firm is large, and (iii) the performances of the public and private firms are highly correlated.