Financing Infrastructure in the Shadow of Expropriation

Viral V Acharya, Cecilia Parlatore and Suresh Sundaresan

The Review of Financial Studies, 2025, vol. 38, issue 5, 1368-1418

Abstract: We examine the optimal financing of infrastructure when governments can expropriate rents from private sector firms that manage infrastructure. While private firms need incentives to implement projects well, governments need incentives to limit expropriation. This double moral hazard limits the willingness of outside investors to fund infrastructure projects. Optimal financing contracts involve government guarantees to investors against project failure to incentivize the government to agree not to expropriate, thus improving private sector incentives and project quality. The contract also reflects several other features prevalent in infrastructure financing in practice, among which are government coinvestment, tax subsidies, and development rights.

JEL-codes: D82 G30 G32 G38 H20 H54 (search for similar items in EconPapers)
Date: 2025
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