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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 Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-315.

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Date of creation: 11 May 2012
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Handle: RePEc:tse:wpaper:25892

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  1. Susan Athey & Armin Schmutzler, 1995. "Product and Process Flexibility in an Innovative Environment," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 557-574, Winter.
  2. Jones, Robert A & Ostroy, Joseph M, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 13-32, January.
  3. Boyer, Marcel & Robert, Jacques, 2006. "Organizational inertia and dynamic incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 324-348, March.
  4. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  5. 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.
  6. Boyer, M. & Moreaux, A., 1989. "Uncertainty, Capacity And Flexibility: The Monopoly Case," Cahiers de recherche 8911, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. 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.
  8. 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.
  9. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, 09.
  10. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  11. 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.
  12. Schmitz, Patrick W., 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," CEPR Discussion Papers 5145, C.E.P.R. Discussion Papers.
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Cited by:
  1. Hoppe, Eva I & Schmitz, Patrick W, 2010. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," CEPR Discussion Papers 7681, C.E.P.R. Discussion Papers.
  2. Marco Buso, 2014. "Public-Private Partnership: Information Externality in Sequential Investments," "Marco Fanno" Working Papers 0176, Dipartimento di Scienze Economiche "Marco Fanno".
  3. Schmitz, Patrick W., 2013. "Public Procurement in Times of Crisis: The Bundling Decision Reconsidered," MPRA Paper 53712, University Library of Munich, Germany.

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