Termination fees and contract design in public-private partnerships

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 032.2018

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Asymmetric and Private Information; Mechanism Design ; Economics of Contract: Theory ; National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock
• Subject: Public Projects ; Public-private Partnerships ; Adverse Selection ; Real Options ; Investment Timing ; Termination Fees

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Buso, Marco ; Dosi, Cesare ; Moretto, Michele
• Event: Veröffentlichung
• (who): Fondazione Eni Enrico Mattei (FEEM)
• (where): Milano
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/191374
• Last update: 10.03.2025, 11:41 AM CET