Public–private partnerships, asymmetric information, and incomplete contracts

We develop an incomplete-contracting model in which the government engages a private contractor to provide a public good. Over time, adaptations of the good to changing circumstances may become desirable. The contractor privately learns the costs of implementing these adaptations. We compare two organizational forms. In a public–private partnership, the government actively participates in project management and, by incurring information-gathering costs, may ascertain the contractor’s adaptation costs. Under traditional procurement, the government lacks direct involvement in project management, preventing it from ascertaining the adaptation costs. We show that the government’s potentially enhanced access to the contractor’s information in a public–private partnership can either support or undermine the case for such partnerships. • The government engages a private contractor to provide a public good. • The contractor privately learns the costs of implementing adaptations. • In traditional procurement, the government cannot learn the adaptation costs. • In a partnership, the government may engage in costly information gathering. • The possibility of information gathering can help or hurt the case for partnerships.