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Do exit options increase the value for money of public–private partnerships?

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  • Marco Buso
  • Cesare Dosi
  • Michele Moretto

Abstract

We study the effects of granting an exit option allowing the private party to terminate a Public–Private Partnerships contract early if it turns out to be loss‐making. In a continuous‐time setting with hidden information about the private returns on investment, we show that an exit option, acting as a risk‐sharing device, can soften agency problems and, in so doing, spur investment and increase the government's expected payoff, even while taking into account the costs that the public sector will have to meet in the future to resume the project.

Suggested Citation

  • Marco Buso & Cesare Dosi & Michele Moretto, 2021. "Do exit options increase the value for money of public–private partnerships?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 721-742, November.
    • Handle: RePEc:bla:jemstr:v:30:y:2021:i:4:p:721-742
    DOI: 10.1111/jems.12440
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    Cited by:

    1. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    2. Buso, Marco & Moretto, Michele & Zormpas, Dimitrios, 2021. "Excess returns in Public-Private Partnerships: Do governments pay too much?," Economic Modelling, Elsevier, vol. 102(C).
    3. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2023. "Dynamic, incentive-compatible contracting for health services," Working Papers 2023.16, Fondazione Eni Enrico Mattei.
    4. Chiara D’Alpaos & Michele Moretto & Paolo Rosato, 2023. "Common-Property Resource Exploitation: A Real Options Approach," Land, MDPI, vol. 12(7), pages 1-22, June.
    5. Marco Buso & Cesare Dosi & Michele Moretto, 2023. "Dynamic Regulation of Public Franchises with Imperfectly Correlated Demand Shocks," Working Papers 2023.03, Fondazione Eni Enrico Mattei.
    6. Marco Buso & Cesare Dosi & Michele Moretto, 2023. "Taxation of Public Franchises with Persistent Demand Shocks," "Marco Fanno" Working Papers 0306, Dipartimento di Scienze Economiche "Marco Fanno".

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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