The Economics of Large Scale Infrastructure Project Finance: An Empirical Examination

33 Pages Posted: 26 Mar 2008

See all articles by Rajeev J. Sawant

Rajeev J. Sawant

Florida Atlantic University - Department of Management

Date Written: Jan 11, 2008

Abstract

This paper is an empirical examination of the use of structured finance, namely Project Finance, to mitigate transaction costs arising from specific investments, the threat of opportunistic behavior and incomplete contracts. The use of project finance to mitigate underinvestment resulting from conflict between debt and equity holders within a firm is also examined. The paper examines the hypothesis that firms use the Project Finance structure when faced with a) large sunk investments and potentially opportunistic buyers and suppliers (including governments who provide legal and physical infrastructure) and b) existing risky debt that would cause equity holders to pass up positive NPV investments. I find that the propensity for the Project Finance structure is more likely when transaction costs are high. The theory of underinvestment is weakly supported.

Keywords: Project Finance, Underinvestment, Transaction Cost Economics, Structured Finance, Investment

JEL Classification: G31, G32

Suggested Citation

Sawant, Rajeev J., The Economics of Large Scale Infrastructure Project Finance: An Empirical Examination (Jan 11, 2008). Available at SSRN: https://ssrn.com/abstract=1107641 or http://dx.doi.org/10.2139/ssrn.1107641

Rajeev J. Sawant (Contact Author)

Florida Atlantic University - Department of Management ( email )

777 Glades Road
Boca Raton, FL 33433
United States

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