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Financing Infrastructure in the Shadow of Expropriation

Author

Listed:
  • Viral V Acharya
  • Cecilia Parlatore
  • Suresh Sundaresan

Abstract

We examine the optimal financing of infrastructure when governments can expropriate rents from private sector firms that manage infrastructure. While private firms need incentives to implement projects well, governments need incentives to limit expropriation. This double moral hazard limits the willingness of outside investors to fund infrastructure projects. Optimal financing contracts involve government guarantees to investors against project failure to incentivize the government to agree not to expropriate, thus improving private sector incentives and project quality. The contract also reflects several other features prevalent in infrastructure financing in practice, among which are government coinvestment, tax subsidies, and development rights.

Suggested Citation

  • Viral V Acharya & Cecilia Parlatore & Suresh Sundaresan, 2025. "Financing Infrastructure in the Shadow of Expropriation," The Review of Financial Studies, Society for Financial Studies, vol. 38(5), pages 1368-1418.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:5:p:1368-1418.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf007
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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