The Economics of Large Scale Infrastructure Project Finance: An Empirical Examination
33 Pages Posted: 26 Mar 2008
Date Written: Jan 11, 2008
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
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