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A Flexible Franchise Fee Scheme in a BOT Project

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  • Yao-Min Chiang

    ()
    (Department of Finance, National Chengchi University, Taipei, Taiwan, 11605)

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    Abstract

    The relationship between a government and a franchise firm in a build-operate-transfer (BOT) project is one that is wrought with incentive problems. It is well known that a contingent payment structure can help alleviate moral hazard problems. This paper provides a flexible franchise fee scheme from the perspective of a government which can charge a sufficient franchise fee and provide enough incentive for a private firm in a BOT project. This flexible franchise fee structure has option-like properties. A pricing model is derived in this paper to price this flexible franchise fee scheme. The closed-form pricing model that I have provided in this paper can help evaluate the effect of a flexible franchise fee on the performance of BOT projects. A numerical analysis shows that the proposed flexible franchise fee scheme is especially suitable for BOT projects with long investment horizons and revenue uncertainty.

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    Bibliographic Info

    Article provided by Asian Real Estate Society in its journal International Real Estate Review.

    Volume (Year): 15 (2012)
    Issue (Month): 1 ()
    Pages: 127-139

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    Handle: RePEc:ire:issued:v:15:n:01:2012:p:127-139

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    Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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    Web page: http://www.asres.org/

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    Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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    Web: http://www.asres.org/

    Related research

    Keywords: BOT; Franchise fee; Real options; Option pricing model;

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    1. Bruce, Donald & Santore, Rudy, 2006. "On optimal real estate commissions," Journal of Housing Economics, Elsevier, vol. 15(2), pages 156-166, June.
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