Optimization of Concession Payments in Stochastic Model of Public-Private Partnership

Vadim Arkin and Alexander Slastnikov ()

Journal of the New Economic Association, 2017, vol. 36, issue 4, 31-47

Abstract: The paper proposes a theoretical model, which allows to set and solve the problem of choosing a concession payment for the implementation of a concession project. The proposed approach is based on two-level optimization scheme that takes into account the interests of both the state and the concessionaire. At the lower level the concessionaire chooses the time of investment that maximizes his NPV from the project, and at the upper level the state, which, knowing the optimal principle of the concessionaire's behavior, sets such a payment at which the budgetary effect of the implemented project will be maximum. In the case when the profit from the project is modeled by a random process of geometric Brownian motion, we receive an explicit formula for the optimal concession payment and study its dependencies on the average growth rate and volatility of the profit from the project, on the tax burden, on the concessionaire's share in initial investments. We discuss some properties of the obtained results, and conclude that the use of the optimal concession payment not only ensures the maximum possible budget filling (from this project), but also is an incentive mechanism for attracting investments to concession projects.

Keywords: investment project; public-private partnership; concession; concession payments; budgetary effect (search for similar items in EconPapers)
JEL-codes: C61 D81 G38 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:nea:journl:y:2017:i:36:p:31-47

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