Bundling versus unbundling: asymmetric information on information externalities

This paper addresses the benefits of bundling two sequential activities in the context of public–private partnerships (PPPs). The paper introduces a source of asymmetric information in the form of an externality parameter that links the building stage with subsequent operational activity. Within this framework, bundling allows the government to extract private information about the magnitude of the externality parameter. The framework also implies a higher degree of asymmetric information related to the operational stage than unbundling does when the contract is written. Our results indicate that the use of bundled contracts allows PPPs to be commitment devices that force governments to define ex-ante more coherent and informed plans, thereby improving investments and reducing unexpected cost overruns. However, because of the presence of asymmetric information, bundling makes any cost-reducing effort suboptimal during the operational phase.