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Termination Fees and Contract Design in Public-Private Partnerships

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  • Buso, Marco
  • Dosi, Cesare
  • Moretto, Michele

Abstract

We study the effects of granting an exit option that enables the private party to early terminate a PPP project if it turns out to be loss-making. In a continuous time setting with hidden information about stochastic operating profits, we show that a revenue-maximizing government can optimally trade-off direct subsidies for capital investment against the right of opting out the PPP. In particular, the exit option, acting as a risk-sharing device, can soften agency problems and increase the value-for-money of public spending, even while taking into account the budgetary resources needed to resume the project in the event of early termination by the contractor.

Suggested Citation

  • Buso, Marco & Dosi, Cesare & Moretto, Michele, 2019. "Termination Fees and Contract Design in Public-Private Partnerships," ETA: Economic Theory and Applications 281284, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemth:281284
    DOI: 10.22004/ag.econ.281284
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    More about this item

    Keywords

    Research Methods/ Statistical Methods;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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