Addressing Adverse Selection in Public-Private Partnership (PPP) Procurement: An Agent-Based Approach

Abstract

In risky public-private partnership (PPP) projects, governments and public institutions tend to offer private investors certain guarantees for their participation. However, when public sector capacity and institutions are weak, these guarantees can generate moral hazard in the bidding process and lead to contractual renegotiations, resulting in a loss for taxpayers. Drawing on a sophisticated, agent-based model that recreates the complex dynamics of the PPP procurement process, this paper demonstrates public sector competency is crucial for limiting moral hazard when guarantees are offered in PPP projects.