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A Flexible Franchise Fee Scheme in a BOT Project

Author

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  • Yao-Min Chiang

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

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.

Suggested Citation

  • Yao-Min Chiang, 2012. "A Flexible Franchise Fee Scheme in a BOT Project," International Real Estate Review, Asian Real Estate Society, vol. 15(1), pages 127-139.
  • Handle: RePEc:ire:issued:v:15:n:01:2012:p:127-139
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    References listed on IDEAS

    as
    1. Anglin, Paul M & Arnott, Richard, 1991. "Residential Real Estate Brokerage as a Principal-Agent Problem," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 99-125, June.
    2. Bruce, Donald & Santore, Rudy, 2006. "On optimal real estate commissions," Journal of Housing Economics, Elsevier, vol. 15(2), pages 156-166, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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