Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships

Daniel Danau and Annalisa Vinella

Journal of Industrial Economics, 2021, vol. 69, issue 4, 923-966

Abstract: A public‐private partnership requires specialized expertise during construction of an infrastructure. Construction completion is costlier if the firm invests more upfront and if the government replaces the firm beforehand; more investment makes the operating cost more likely to be low. With a renegotiation‐proof contract, the government lessens moral hazard, unless this is severe or the incentives to renege in mid‐construction are strong. In these cases, it is less costly to motivate the parties to execute, in operation, a contract that was renegotiated in mid‐construction. Thus, the government offers a contract which leads to renegotiation in mid‐construction to secure more investment.

Date: 2021
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https://doi.org/10.1111/joie.12280

Related works:
Working Paper: Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships* (2021)
Working Paper: Under/Over-Investment and Early Renegotiation in Public-Private Partnerships (2019)
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