Termination Fees and Contract Design in Public-Private Partnerships

Authors

Marco Buso, Interuniversity Centre for Public Economics (CRIEP) and Interdepartmental Centre G. Levi Cases for Energy, Economics and Technology, University of Padova
Cesare Dosi, Department of Economics and Management, University of Padova and Centro di Ricerca Interuniversitario sull’Economia Pubblica (CRIEP), Italy
Michele Moretto, Department of Economics and Management, University of Padua, Italy

Date of This Version

12-20-2018

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 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.

Recommended Citation

Buso, Marco; Dosi, Cesare; and Moretto, Michele, "Termination Fees and Contract Design in Public-Private Partnerships" (December 20, 2018). Fondazione Eni Enrico Mattei Working Papers. Paper 1257.
https://services.bepress.com/feem/paper1257