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From fixed to state-dependent duration in public-private partnerships

Author

Listed:
  • Annalisa Vinella

    (UNIBA - Università degli studi di Bari Aldo Moro = University of Bari Aldo Moro)

  • Daniel Danau

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract
A government delegates a build‐operate‐transfer project to a private firm. In the contracting stage, the operating cost is unknown. The firm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly effort when building the infrastructure. Once the infrastructure is in place, the firm learns the true cost and begins to operate. Under limited commitment, either partner may renege on the contract at any moment thereafter. The novelty with respect to incentive theory is that the contractual length is stipulated in the contract in such a way that it depends on the cost realization. Our main result is that, if the break‐up of the partnership is sufficiently costly to the government and/or adverse selection and moral hazard are sufficiently severe, then the efficient contract is not robust to renegotiation unless it has a longer duration when the realized cost is low. This result is at odds with the literature on flexible‐term contracts, which recommends a longer duration when operating conditions are unfavorable, yet, with regard to a different setting, where the demand is uncertain and the cash‐flow is exogenous.

Suggested Citation

  • Annalisa Vinella & Daniel Danau, 2017. "From fixed to state-dependent duration in public-private partnerships," Post-Print halshs-02268001, HAL.
    • Handle: RePEc:hal:journl:halshs-02268001
    DOI: 10.1111/jems.12204
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    Cited by:

    1. Marco Buso & Cesare Dosi & Michele Moretto, 2021. "Do exit options increase the value for money of public–private partnerships?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 721-742, November.
    2. Daniel Danau & Annalisa Vinella, 2021. "Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 923-966, December.
    3. Giuseppe Di Liddo & Annalisa Vinella, 2022. "Asymmetric yardstick competition: traditional procurement versus public-private partnerships," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(3), pages 669-695, November.
    4. Marco Buso & Cesare Dosi & Michele Moretto, 2018. "Termination Fees and Contract Design in Public-Private Partnerships," "Marco Fanno" Working Papers 0227, Dipartimento di Scienze Economiche "Marco Fanno".

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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