The Basic Public Finance of Public-Private Partnerships

63 Pages Posted: 19 Nov 2007 Last revised: 5 Feb 2008

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)

Alexander Galetovic

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

Ronald D. Fischer

University of Chile - Center of Applied Economics (CEA)

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2008

Abstract

Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are desirable because the private sector is more efficient, the contract that optimally trades demand risk, user-fee distortions and the opportunity cost of public funds is characterized by a minimum revenue guarantee and a cap on the firm's revenues. Yet income guarantees and revenue sharing arrangements observed in practice differ fundamentally from those suggested by the optimal contract. The optimal contract can be implemented via a competitive auction with realistic informational requirements; and risk allocation under the optimal contract suggests that PPPs are closer to public provision than to privatization.

Keywords: Bundling, cost of public funds, subsidies, minimum revenue guarantees, revenue and profit caps, Demsetz auctions, privatization, scope of government

JEL Classification: H21, H54, L51, R42

Suggested Citation

Engel, Eduardo M. and Galetovic, Alexander and Fischer, Ronald D., The Basic Public Finance of Public-Private Partnerships (February 1, 2008). Yale University Economic Growth Center Discussion Paper No. 957. Available at SSRN: https://ssrn.com/abstract=1001758

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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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 Padova - CRIEP ( email )

Padua
Italy

Ronald D. Fischer

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

Republica 701
Casilla 2777
Santiago
Chile
+56/2/678 4055 (Phone)
+56/2/689 7895 (Fax)

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