 Private finance initiative in incomplete contracts: Theory and evidence from JapanYukari Fukuda Japan and the World Economy, 2019, vol. 50, issue C, 56-65 Abstract: Private finance initiative (PFI) is a way of creating "public–private partnerships" (PPPs) where private firms are contracted to complete and manage public projects. The purpose of this paper is to investigate how to achieve a desirable procurement contract in PFIs. In the first part, we develop an incomplete contracting model to analyze the effectiveness of PFIs. We show that an appropriate fixed compensation is important in disentangling adverse selection. In the second part, we test the validity of this theoretical implication by case study of “Thalasso Fukuoka” and by cross-sectional analysis on Japan’s PFIs. The case study indicates that adverse selection under overestimated value for money (VFM) was a major reason for why the project failed. The cross-sectional analysis also shows that when the local government had overestimated the initial VFM, adverse selection discouraged private companies with higher reservation profits to apply for the project. It suggests that the overestimated initial VFM could make the project less productive even if it did not lead the project to bankrupcy. Keywords: PFI; Incomplete contract; Adverse selection; VFM (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:japwor:v:50:y:2019:i:c:p:56-65 DOI: 10.1016/j.japwor.2019.04.002 Access Statistics for this article Japan and the World Economy is currently edited by Robert Dekle and Yasushi Hamao More articles in Japan and the World Economy from Elsevier |
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