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 when accounting for the budgetary resources needed to resume the project in the event of early termination by the contractor.

Termination fees and contract design in public – private partnerships

C. Dosi;M. Moretto
2018

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 when accounting for the budgetary resources needed to resume the project in the event of early termination by the contractor.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11577/3294169
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