Arm's Length Provision of Public Services

Morten Bennedsen, Christian Schultz

Research output: Working paperResearch

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We analyze the economic consequences of strategic delegation of the right to decide between public or private provision of governmental service and/or the authority to negotiate and renegotiate with the chosen service provider. Our model encompass both bureaucratic delegation from a government to a privatization agency and electoral delegation from voters to a government. We identify two powerfull effects of delegation when contracts are incomplete: The incentive effect increases the incentive part of service providers’ remuneration and we show that strategic delegation may substitute formal incentive contracts. The bargaining effect improves the bargaining position vis a vis a private firm with market power and leads to a lower price for the service.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherDepartment of Economics. Copenhagen Business School
Number of pages45
Publication statusPublished - 2007
SeriesWorking Paper / Department of Economics. Copenhagen Business School


  • Outsourcing
  • Strategic delegation
  • Incentives
  • Incomplete contracting
  • Market power
  • Representative democracy

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