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Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships *
Author(s) -
Danau Daniel,
Vinella Annalisa
Publication year - 2021
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12280
Subject(s) - government (linguistics) , investment (military) , moral hazard , incentive , general partnership , business , finance , contract management , economics , microeconomics , marketing , law , political science , philosophy , linguistics , politics
A public‐private partnership requires specialized expertise during construction of an infrastructure. Construction completion is costlier if the firm invests more upfront and if the government replaces the firm beforehand; more investment makes the operating cost more likely to be low. With a renegotiation‐proof contract, the government lessens moral hazard, unless this is severe or the incentives to renege in mid‐construction are strong. In these cases, it is less costly to motivate the parties to execute, in operation, a contract that was renegotiated in mid‐construction. Thus, the government offers a contract which leads to renegotiation in mid‐construction to secure more investment.