A Pitfall of Private Participation in Infrastructure

Abstract

According to a popular belief, private participation in infrastructure service improves overall service efficiency. However, empirical evidence is mixed. In particular, private participation likely creates a potential agency problem, which may adversely affect service efficiency. This implies that proper government regulations can control opportunistic misbehaviors of private participants and reduce their behavioral uncertainty. Therefore, the effects of private participation on the efficiency of the power service can be hypothesized to be positively augmented by the level of government regulations. We developed an empirical model based upon key institutional, political, and socio-economic variables. The results suggest that private participation is in fact negatively associated with the efficiency of the power service. However, the results also show that the overall effects of private participation on efficiency are positively augmented according to the level of government regulations.