The Basic Public Finance of Public-Private Partnerships

32 Pages Posted: 17 Jul 2007 Last revised: 2 Mar 2011

See all articles by Eduardo M. R. A. Engel

Eduardo M. R. A. Engel

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA)

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2011

Abstract

Public-private partnerships (PPPs) have been justified because they release public funds or save on distortionary taxes. However, the resources saved by a government that does not finance the upfront investment are offset by giving up future revenue flows to the concessionaire. If a PPP can be justified on efficiency grounds, the PPP contract that optimally balances demand risk, userfee distortions and the opportunity cost of public funds has a minimum revenue guarantee and a revenue cap. The optimal contract can be implemented via a competitive auction with reasonable informational requirements. The optimal revenue guarantees, revenue sharing agreements and auction mechanisms are different from those observed in the real world. In particular, the optimal contract duration is shorter in demand states where the revenue cap binds. These results also have implications for budgetary accounting of PPPs, as they show that their fiscal impact resembles that of public provision, rather than privatization.

Keywords: Bundling, Cost of public funds, Demsetz auction, Minimum revenue guarantees, Privatization, Revenue and profit caps, Scope of government, Subsidies

JEL Classification: H21, H54, L51, R42

Suggested Citation

Engel, Eduardo M. and Fischer, Ronald D. and Galetovic, Alexander, The Basic Public Finance of Public-Private Partnerships (January 1, 2011). Cowles Foundation Discussion Paper No. 1618; Yale University Economic Growth Center Discussion Paper No. 957; Yale Economics Department Working Paper No. 35. Available at SSRN: https://ssrn.com/abstract=1001212

Eduardo M. Engel (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA) ( email )

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Santiago
Chile
+56/2/678 4055 (Phone)
+56/2/689 7895 (Fax)

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

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