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How to Design Public-Private Partnerships in a Warming World? - When Infrastructure Becomes a Really “Hot” Topic

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Author Info

  • David Martimort

    (Paris School of Economics-EHESS. Email: david.martimort@parisschoolofeconomics.eu)

  • Stéphane Straub

    (Toulouse School of Economics, ARQADE and IDEI. Email: stephane.straub@univ-tlse1.fr)

Abstract

We analyze how the deep current scientific uncertainty regarding future climate conditions affects the design of Public Private Partnerships (PPPs) contracts between a government (principal) and a firm (agent), especially in infrastructure sectors that are highly sensitive to such changing weather conditions. Consistently with the literature on uncertainty and irreversibility, the prospect of future, uncertain productivity shocks that affect the returns on the firm’s effort in the future creates an option value of delaying efforts. By designing dynamic intertemporal incentive schemes for his agent, the principal can play on this option value. Whether this option value is exacerbated or not in an agency context depends on the properties of the agent’s cost of efforts.

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File URL: http://web2.msm.nl/RePEc/msm/wpaper/MSM-WP2011-25.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Maastricht School of Management in its series Working Papers with number 2011/25.

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Length: 40 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:msm:wpaper:2011/25

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Keywords: Public-private partnerships; global warming; option value; principal-agent.;

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  1. Elisabetta Iossa & David Martimort, 2008. "The Simple Micro-Economics of Public-Private Partnerships," The Centre for Market and Public Organisation 08/199, Department of Economics, University of Bristol, UK.
  2. Robert S. Pindyck, 2010. "Fat Tails, Thin Tails, and Climate Change Policy," Working Papers 1012, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  3. Jones, Robert A & Ostroy, Joseph M, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 13-32, January.
  4. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Documentos de Trabajo 234, Centro de Economía Aplicada, Universidad de Chile.
  5. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2011. "The Environment and Directed Technical Change," CEPR Discussion Papers 8660, C.E.P.R. Discussion Papers.
  6. 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.
  7. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  8. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  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. Boyer, M. & Moreaux, A., 1989. "Uncertainty, Capacity and Flexibility: the Monopoly Case," Cahiers de recherche 8911, Universite de Montreal, Departement de sciences economiques.
  11. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  12. 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.
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