Termination Fees and Contract Design in Public-Private Partnerships

Data
06.11.2018

Autori

Marco Buso (Interuniversity Centre for Public Economics CRIEP, Interdepartmental Centre G. Levi Cases for Energy, Economics and Technology – University of Padova) Cesare Dosi (University of Padova, Interuniversity Centre for Public Economics CRIEP); Michele Moretto (University of Padova)

Codice JEL
D81, D82, D86, H54

Parole chiave:
Public Projects, Public-private Partnerships, Adverse Selection, Real Options, Investment Timing, Termination Fees

Publisher
Economic Theory and Applications

Editor
Matteo Manera

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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.

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Suggested citation: Buso, M., C. Dosi, M. Moretto (2018), ‘Termination Fees and Contract Design in Public-Private Partnerships’, Nota di Lavoro 32.2018, Milano, Italy: Fondazione Eni Enrico Mattei.