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How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships

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  • Martimort, David
  • Straub, Stéphane

Abstract

We analyze how uncertainty regarding future climate conditions affects the design of concession contracts, organizational forms and technological choices in a principal-agent context with dynamic moral hazard, limited liability and irreversibility constraints. The prospect of future, uncertain productivity shocks on the returns on the firm’s effort creates an option value of delaying efforts which exacerbates agency costs. Contracts and organizational forms are drafted to control this cost of delegated flexibility. Our analysis is relevant for infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of Public-Private Partnerships in this context.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 724.

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Date of creation: 11 May 2012
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Handle: RePEc:ide:wpaper:25890

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  1. John Bennett & Elisabetta Iossa, 2002. "Building and Managing Facilities for Public Services," Economics and Finance Discussion Papers 02-08, Economics and Finance Section, School of Social Sciences, Brunel University.
  2. Boyer, Marcel & Robert, Jacques, 2006. "Organizational inertia and dynamic incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 324-348, March.
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  5. Iossa, Elisabetta & Martimort, David, 2011. "Risk Allocation and the Costs and Benefits of Public-Private Partnerships," CEPREMAP Working Papers (Docweb) 1104, CEPREMAP.
  6. Howard C. Kunreuther & Erwann O. Michel-Kerjan, 2009. "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012820, December.
  7. Patrick W. Schmitz, 2005. "Allocating control in agency problems with limited liability and sequential hidden actions," Bonn Econ Discussion Papers bgse27_2005, University of Bonn, Germany.
  8. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  9. Martimort, David & Pouyet, Jérôme, 2006. "'Build It or Not': Normative and Positive Theories of Public-Private Partnerships," CEPR Discussion Papers 5610, C.E.P.R. Discussion Papers.
  10. Marcel BOYER & Michel MOREAUX, 1989. "Uncertainty, Capacity and Flexibility: the Monopoly Case," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 291-313.
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Cited by:
  1. Schmitz, Patrick W, 2013. "Public Procurement in Times of Crisis: The Bundling Decision Reconsidered," CEPR Discussion Papers 9676, C.E.P.R. Discussion Papers.

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