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Opportunism in public-private project financing

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  • Moszoro, Marian

    () (IESE Business School)

Abstract

Opportunism, either governmental or private, may become a powerful deterrent against public-private project financing, especially considering the scale of the investment in infrastructure. The parties can secure themselves against counterparty opportunism by assigning the investor an exit (put) option and the public agent a bail-out (call) option on the private investor's shares. This paper presents a mechanism for converting natural monopolies into contestable markets using over-the-counter option contracts that combine the stability of long-term contracts and the flexibility of short-term contracts. The exit/bail-out option mechanism reduces entry barriers by streamlining incomplete long-term contracts and avoiding contractual problems related to bounded rationality and opportunism.

Suggested Citation

  • Moszoro, Marian, 2010. "Opportunism in public-private project financing," IESE Research Papers D/887, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-0887
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    File URL: http://www.iese.edu/research/pdfs/DI-0887-E.pdf
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    More about this item

    Keywords

    Opportunism; Public-Private Partnerships; Infrastructure; Natural Monopolies; Contestable Markets; Exit and Bail-out Options; Game Theory;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • 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
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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