Do Exit Options Increase the Value-For-Money of Public-Private Partnerships?

46 Pages Posted: 8 Sep 2020

See all articles by Marco Buso

Marco Buso

Catholic University of the Sacred Heart of Milan

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica

Michele Moretto

University of Padua, Dep of Economics and Management

Date Written: September 24, 2020

Abstract

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 financially loss-making. In a continuous-time setting with hidden information about operating profits, we show that an exit option, acting as a risk-sharing device, can soften agency problems and, in so doing, accelerate investment and increase the government's expected payoff, even while taking into account the costs that the public sector will have to meet in the future to take direct responsibility on service provision.

Keywords: Public Infrastructure Services, Public-Private Partnerships, Adverse Selection, Real Options, Early Termination Fees

JEL Classification: D81, D82, D86, H54

Suggested Citation

Buso, Marco and Dosi, Cesare and Moretto, Michele, Do Exit Options Increase the Value-For-Money of Public-Private Partnerships? (September 24, 2020). FEEM Working Paper No. 3.2020, Available at SSRN: https://ssrn.com/abstract=3698643 or http://dx.doi.org/10.2139/ssrn.3698643

Marco Buso

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica ( email )

via Del Santo 33
Padova, 35123
Italy
049+8274049 (Phone)
049+8274221 (Fax)

Michele Moretto (Contact Author)

University of Padua, Dep of Economics and Management ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

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