Economics at your fingertips  

Agency problems in public-private partnerships investment projects

Florina Silaghi and Sudipto Sarkar

European Journal of Operational Research, 2021, vol. 290, issue 3, 1174-1191

Abstract: This paper examines concession contracts between a private firm and a government in the presence of moral hazard within a real-options framework. The design of optimal contracts to provide incentives to the private firm to exert effort is analyzed. We show that although first-best investment timing can be implemented, contracts often do not provide firms with proper incentives to exert effort, resulting in high-cost projects being undertaken. This problem can be alleviated through the use of a monitoring technology that imposes a penalty on the shirking firm. Although monitoring distorts the investment timing leading to a delayed investment, it increases the government’s profits at the expense of the firm, so that the government finds it optimal to induce effort exertion, increasing the likelihood of low-cost projects. Considering jointly incentives and an exit option, we show that the regular compensation of firms and their compensation upon termination act as substitutes in providing incentives. Governments should set these remunerations jointly in order to minimize the cost of a bailout option for the society.

Keywords: Finance; Investment analysis; Agency problem; Public and private partnership; Real options (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.ejor.2020.08.050

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2023-05-18
Handle: RePEc:eee:ejores:v:290:y:2021:i:3:p:1174-1191