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How to Design Public-Private Partnerships in a Warming World? - When Infrastructure Becomes a Really “Hot” Topic

  • David Martimort

    (Paris School of Economics-EHESS. Email: david.martimort@parisschoolofeconomics.eu)

  • Stéphane Straub

    (Toulouse School of Economics, ARQADE and IDEI. Email: stephane.straub@univ-tlse1.fr)

We analyze how the deep current scientific uncertainty regarding future climate conditions affects the design of Public Private Partnerships (PPPs) contracts between a government (principal) and a firm (agent), especially in infrastructure sectors that are highly sensitive to such changing weather conditions. Consistently with the literature on uncertainty and irreversibility, the prospect of future, uncertain productivity shocks that affect the returns on the firm’s effort in the future creates an option value of delaying efforts. By designing dynamic intertemporal incentive schemes for his agent, the principal can play on this option value. Whether this option value is exacerbated or not in an agency context depends on the properties of the agent’s cost of efforts.

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File URL: http://web2.msm.nl/RePEc/msm/wpaper/MSM-WP2011-25.pdf
File Function: First version, 2011
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Paper provided by Maastricht School of Management in its series Working Papers with number 2011/25.

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Length: 40 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:msm:wpaper:2011/25
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  1. Marcel BOYER & Michel MOREAUX, 1989. "Uncertainty, Capacity and Flexibility: the Monopoly Case," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 291-313.
  2. John Bennett & Elisabetta Iossa, 2004. "Building and Managing Facilities for Public Services," Public Policy Discussion Papers 02-08, Economics and Finance Section, School of Social Sciences, Brunel University.
  3. Martimort, David & Pouyet, Jérôme, 2006. "'Build It or Not': Normative and Positive Theories of Public-Private Partnerships," CEPR Discussion Papers 5610, C.E.P.R. Discussion Papers.
  4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
  5. Robert S. Pindyck, 2010. "Fat Tails, Thin Tails, and Climate Change Policy," Working Papers 1012, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  6. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  7. Elisabetta Iossa & David Martimort, 2008. "The Simple Micro-Economics of Public-Private Partnerships," CEIS Research Paper 139, Tor Vergata University, CEIS, revised 15 Feb 2013.
  8. Franck Lecocq & Zmarak Shalizi, 2014. "The economics of targeted mitigation in infrastructure," Climate Policy, Taylor & Francis Journals, vol. 14(2), pages 187-208, March.
  9. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2008. "The Basic Public Finance of Public-Private Partnerships," Working Papers 35, Yale University, Department of Economics.
  10. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2010. "The Environment and Directed Technical Change," Seminar Papers 762, Stockholm University, Institute for International Economic Studies.
  11. Ohlendorf, Susanne & Schmitz, Patrick W, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  12. Jones, Robert A & Ostroy, Joseph M, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 13-32, January.
  13. Howard C. Kunreuther & Erwann O. Michel-Kerjan, 2009. "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012820, June.
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