Termination Fees and Contract Design in Public-Private Partnerships

Marco Buso, Cesare Dosi and Michele Moretto
Additional contact information
Marco Buso: Interuniversity Centre for Public Economics (CRIEP) and Interdepartmental Centre G. Levi Cases for Energy, Economics and Technology, University of Padova
Cesare Dosi: Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics (CRIEP)

No 2018.32, Working Papers from Fondazione Eni Enrico Mattei

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: Public Projects; Public-private Partnerships; Adverse Selection; Real Options; Investment Timing; Termination Fees (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 H54 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-mic and nep-ppm
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Related works:
Working Paper: Termination Fees and Contract Design in Public-Private Partnerships (2019)
Working Paper: Termination Fees and Contract Design in Public-Private Partnerships (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2018.32

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