Termination Fees and Contract Design in Public-Private Partnerships

Marco Buso (), Cesare Dosi () and Michele Moretto
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Marco Buso: University of Padova
Cesare Dosi: University of Padova

No 227, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We study the effects of granting an exit option that enables the private party to early terminate a PPP project if it turns out to be loss-making. In a continuous-time setting with hidden information about stochastic operating profits, we show that a revenue-maximizing government can optimally trade-off direct subsidies for capital investment against the right of opting out the PPP. In particular, the exit option, acting as a risk-sharing device, can soften agency problems and increase the value-for-money of public spending, even while taking into account the budgetary resources needed to resume the project in the event of early termination by the contractor.

Keywords: Public projects; Public-private partnerships; Adverse selection; Real options; Investment timing; Termination fees (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 H54 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2018-10
New Economics Papers: this item is included in nep-cta, nep-mic, nep-ppm and nep-pub
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https://economia.unipd.it/sites/economia.unipd.it/files/20180227.pdf (application/pdf)

Related works:
Working Paper: Termination Fees and Contract Design in Public-Private Partnerships (2019)
Working Paper: Termination Fees and Contract Design in Public-Private Partnerships (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0227

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