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Opportunism in public-private project financing

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  • Moszoro, Marian

    ()
    (IESE Business School)

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    Abstract

    Opportunism, either governmental or private, may become a powerful deterrent against public-private project financing, especially considering the scale of the investment in infrastructure. The parties can secure themselves against counterparty opportunism by assigning the investor an exit (put) option and the public agent a bail-out (call) option on the private investor's shares. This paper presents a mechanism for converting natural monopolies into contestable markets using over-the-counter option contracts that combine the stability of long-term contracts and the flexibility of short-term contracts. The exit/bail-out option mechanism reduces entry barriers by streamlining incomplete long-term contracts and avoiding contractual problems related to bounded rationality and opportunism.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/887.

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    Length: 27 pages
    Date of creation: 15 Oct 2010
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0887

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    Related research

    Keywords: Opportunism; Public-Private Partnerships; Infrastructure; Natural Monopolies; Contestable Markets; Exit and Bail-out Options; Game Theory;

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