Regulation Costs and Private-Sector Know-How Spillovers of Public-Private Partnerships

Abstract

The paper presents comparative statics of organizational modes of natural monopoly in public utilities with a focus on co-ownership and co-governance. Private monopoly lowers output and increases price to maximize profit; public monopoly incurs higher costs due to the lack of know-how; and a regulated monopoly results in regulation costs to overcome informational asymmetries. A public-private partnership arises as an efficient organization mode when it enables the internalization of private know-how and saves regulation costs due to correspondingly sufficient private and public residual and control rights. Public-private monopoly supports higher prices than marginal costs due to rent sharing, with its upper price frontier decreasing in private residual rights.