Assymetry of information, litigation and social well-being the the context of a public/private partnership: the case of infrastructure construction of public interest in Africa

In this article, we analyzes the optimal structure of public/private partnership agreements, in cases where these contracts concern the construction of economic infrastructure. We consider a form of incentive contract stipulating rules of payment based on the ex post value, which are calculated based on the observed costs of the project and a fixed price. In cases where a private contractor can influence the final cost of a project by an action unobservable by the principal, there is a risk that a dispute will arise concerning the project's observable cost. We show that, the optimal contract establish a balance between moral hazard and risk sharing. We derive the feasible mechanisms, either in the presence or absence of litigation. In litigation contest, a fixed-price contract may be inferior to a cost-plus contract. This result stands in contrast to the well-established finding that, in providing incentive for the agent to engage in cost-reducing effort, a fixed-price contract dominates a cost-plus contract.