Premium
Do exit options increase the value for money of public–private partnerships?
Author(s) -
Buso Marco,
Dosi Cesare,
Moretto Michele
Publication year - 2021
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12440
Subject(s) - business , government (linguistics) , stochastic game , option value , investment (military) , agency (philosophy) , finance , value (mathematics) , private sector , value for money , agency cost , economics , microeconomics , public economics , incentive , corporate governance , philosophy , linguistics , epistemology , machine learning , politics , political science , computer science , law , shareholder , economic growth
We study the effects of granting an exit option allowing the private party to terminate a Public–Private Partnerships contract early if it turns out to be loss‐making. In a continuous‐time setting with hidden information about the private returns on investment, we show that an exit option, acting as a risk‐sharing device, can soften agency problems and, in so doing, spur 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 resume the project.