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Termination Fees and Contract Design in Public-Private Partnerships

Marco Buso, Cesare Dosi and Michele Moretto

No 281284, ETA: Economic Theory and Applications from Fondazione Eni Enrico Mattei (FEEM)

Abstract: We study the effects of granting an exit option that enables the private party to early terminate a PPP project if it turns out to be loss-making. In a continuous time setting with hidden information about stochastic operating profits, we show that a revenue-maximizing government can optimally trade-off direct subsidies for capital investment against the right of opting out the PPP. In particular, the exit option, acting as a risk-sharing device, can soften agency problems and increase the value-for-money of public spending, even while taking into account the budgetary resources needed to resume the project in the event of early termination by the contractor.

Keywords: Research; Methods/; Statistical; Methods (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-ppm
Date: 2019-01-14
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http://ageconsearch.umn.edu/record/281284/files/NDL2018-032.pdf (application/pdf)

Related works:
Working Paper: Termination Fees and Contract Design in Public-Private Partnerships (2018) Downloads
Working Paper: Termination Fees and Contract Design in Public-Private Partnerships (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemth:281284

DOI: 10.22004/ag.econ.281284

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