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Compensation for Public Service Obligations: How to Account for Efficiency Gains

Phedon Nicolaides

Public authorities may assign public service tasks to private undertakings. The undertakings that provide such services are required to become gradually more efficient during the period of assignment. At the same time, they are not allowed to earn unreasonable profits and be overcompensated for the extra costs of those tasks. Given the fact that efficiency means reduction of the costs of delivery of the services, the question arises how they can incur lower costs without making excessively high profits. This article shows how providers of public services can be incentivised to improve their efficiency and at the same time be compelled to share cost reductions with the public authority that imposes the public service tasks. This is achieved through an appropriate reduction in the amount of compensation.

Professor at the College of Europa and at the University of Maastricht. I am grateful to Adina Claici and to an anonymous referee for comments and suggestions on an earlier version.


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