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The Basic Public Finance of Public-Private Partnerships

Author

Listed:
  • Eduardo Engel

    () (Economic Growth Center, Yale University)

  • Ronald Fischer

    () (Universidad de Chile)

  • Alexander Galetovic

    () (Universidad de Los Andes)

Abstract

Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are desirable because the private sector is more efficient, the contract that optimally trades demand risk, user-fee distortions and the opportunity cost of public funds is characterized by a minimum revenue guarantee and a cap on the firm's revenues. Yet income guarantees and revenue sharing arrangements observed in practice differ fundamentally from those suggested by the optimal contract. The optimal contract can be implemented via a competitive auction with realistic informational requirements; and risk allocation under the optimal contract suggests that PPPs are closer to public provision than to privatization.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Working Papers 957, Economic Growth Center, Yale University.
  • Handle: RePEc:egc:wpaper:957
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bundling; cost of public funds; subsidies; minimum revenue guarantees; revenue and profit caps; Demsetz auctions;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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