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From fixed to state-dependent duration in public-private partnerships

Author

Listed:
  • Daniel Danau

    () (Universitè de Caen Basse-Normandie - Centre de Recherche en Economie et Management)

  • Annalisa Vinella

    () (Università degli Studi di Bari "Aldo Moro" - Dipartimento di Scienze economiche e metodi matematici)

Abstract

A government delegates a build-operate-transfer project to a private Örm. In the contracting stage, the operating cost is unknown. The Örm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly e§ort when building the infrastructure. Once this is in place, the Örm learns the true cost and begins to operate. We show that, under limited commitment, if the break-up of the partnership is su¢ciently costly to the government and/or information problems are su¢ciently severe, the contract is not robust to renegotiation unless it has a longer duration when the realized cost is low. This result is at odds with the prescription of the literature on aÌ exible-term contracts, which recommends a longer duration when operating conditions are unfavourable.

Suggested Citation

  • Daniel Danau & Annalisa Vinella, 2015. "From fixed to state-dependent duration in public-private partnerships," SERIES 01-2015, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Jan 2015.
  • Handle: RePEc:bai:series:series_wp_01-2015
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    More about this item

    Keywords

    Public-private partnerships; state-dependent duration; aÌ exible-term con- tract; limited commitment; renegotiation; break-up;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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