Incentive scheme based on investment plan compliance for public water utilities in Peru

Using the "budget-based scheme" approach developed by Kirby et.al. (1991) and Reichelstein (1992), this paper establishes the optimal policy function in order to control "hidden actions" from managers of Public Water Utilities (PWU) regarding investments that deviate from the Optimized Business Plan (OBP), with the purpose of inducing managers to reduce deviation from the execution of not programmed investments in the OBP and from programmed investments that were not executed. We find a high percentage of investment (47%) that deviates from its OBP. However between 16% and 35% of executed investment that it deviates from its programmation, can be controlled by the PWU manager with a compensation payment schemes.