Review of Industrial Organization (2006) 29:93–126 © Springer 2006
Simple money-based tests for choosing
between private and public delivery:
a discussion of the issues
PAUL A. GROUT
and SILVIA SONDEREGGER
Centre for Market and Public Organization, School of Economics,
Finance and Management, Department of Economics, University of Bristol,
12 Priory Road, Bristol BS8 1TN, UK
Abstract. The decision when to provide services by the public sector and when to use
the private sector is a fundamental one. The economic literature emphasises that the efﬁ-
ciency of the mechanisms of delivery will depend on the contractual nature of what can
be achieved by the parties and the political economy forces. Totally separate from this lit-
erature, however, governments have tried to implement practical and simple tests to indi-
cate when to use private and when to use public delivery methods. The aim of this paper
is to address some of the issues associated with simple money-based tests.
Key words: Public–private partnerships, Concession contracts, Regulation.
JEL Classiﬁcations: D78, L50.
The decision when to provide services by the public sector and when
to use the private sector is a fundamental one, and one that has been
addressed from different angles. The economic literature emphasizes that
the efﬁciency of the mechanisms of delivery will depend on the contrac-
tual nature of what can be achieved by the parties and the political econ-
omy forces. In this framework, private provision is thought to be beneﬁcial
when strong private incentives to reduce cost do little damage to quality; in
contrast, when cost reduction is associated with signiﬁcant damage to qual-
ity then public provision is likely to be better (since although incentives are
dampened the public control can block low quality outcomes).
Author for correspondence: E-mails: P.A.Grout@bristol.ac.uk; S.Sonderegger@
bristol.ac.uk. Phone: +44 (0)117 928 8415; Fax: +44 (0)117 928 8577.
See, for example, Hart et al. (1997) and Shleifer (1998).