Analysis of Public Investment Decision-Making under Information Asymmetry

Abstract

This study examines inefficient budget allocation between “certainly” public projects whose values are known to the public and “uncertainty” public projects whose values are not known to the public, where monitoring systems of government are less developed. Using a simple agency model in a political economy setting, we theoretically explain how information asymmetry and political agency costs induce inefficiency in public investments. A government agent with political concerns about the next election may primarily choose certainty public projects even if the certainty public projects are less socially beneficial than uncertainty public projects. The results of our model suggest that the increase/decrease in budget size without appropriately reducing information asymmetry problem cannot be a fully useful policy to control the inefficient budget allocation between two types of public projects.