Is Public-Private Partnership Better than Traditional Procurement? An Analysis Under Nash Bargaining

Problem Definition: Public-private partnership (PPP) is a form of government procurement where a private entity (firm) provides upfront funding to construct a public project. After the project is completed, the firm collects payments from end consumers to recoup the construction cost and generate a profit.Academic/Practical Relevance: PPPs are particularly useful for the provision of major government infrastructure projects that require large capital expenditures. For these projects, the government and the firm often entertain intense negotiations on the subject of the construction and compensation details. However, existing literature has not studied the impact of negotiations on the outcome of the final PPP agreement.Methodology: This study uses the canonical Nash bargaining solution to evaluate the negotiation outcome between the government and the firm.Results: We solve for the Nash bargaining outcome between the government and the firm under PPP, and compare it to traditional procurement where the government provides the project funding from its operating budget. We find that when the government has a relatively balanced goal of maximizing consumer surplus and public revenue, PPP can lead to a win-win-win situation for the government, the firm, and consumers, compared to traditional procurement. In contrast, when the government's goal is to mainly maximize consumer surplus, PPP can result in worse outcomes. In this case, the government can attain a desired bargaining outcome for all stakeholders by providing subsidies to either the firm or the end consumers.Managerial Implications: Our results are useful for informing policy makers of instances when PPP is better than traditional procurement and when government subsidies should be provided