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HOW TO DESIGN INFRASTRUCTURE CONTRACTS IN A WARMING WORLD: A CRITICAL APPRAISAL OF PUBLIC–PRIVATE PARTNERSHIPS*
Author(s) -
Martimort David,
Straub Stéphane
Publication year - 2016
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12148
Subject(s) - context (archaeology) , moral hazard , business , flexibility (engineering) , economics , contract management , investment (military) , finance , incentive , microeconomics , industrial organization , marketing , paleontology , management , politics , political science , law , biology
We analyze how long‐term uncertainty, for example, regarding future climate conditions, affects the design of concession contracts and organizational forms in a principal–agent context, with dynamic moral hazard, limited liability, and irreversibility constraints. The prospect of future, uncertain productivity shocks on the returns on the firm's effort creates an option value of delaying efforts, a course that exacerbates agency costs. Contracts and organizational forms are drafted to control this cost of delegated flexibility. The possibility for the agent to delay investment in response to uncertainty and irreversibility also elicits preference for unbundling different stages of the project through short‐term contracts. Our analysis is relevant to infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of public–private partnerships in this context.