To allot or not to allot public services? An incomplete contract approach

Using an incomplete contract framework, we analyze the consequences of allotment in public procurement. Allotment aims at dividing a public service into several lots that can be awarded to different operators. This increases the number of bidders during the competitive tendering, as well as it reduces the size of the service managed by each operator. We model the impacts of allotment both on price and quality of public services provided under public procurement. When the quality of services depends on non-contractible efforts made by the operators during the execution of the contract, our results show that (1) the operators have higher incentives to make non-contractible efforts when there is no allotment, and that (2) allotment does not maximize the joint payoffs of the public and private parties (i.e. the total surplus), but mainly benefits public authorities representing the users of the service. Copyright Springer Science+Business Media, LLC 2014