Opportunism in Public-Private Project Financing

30 Pages Posted: 17 Oct 2010 Last revised: 14 Oct 2013

See all articles by Marian W. Moszoro

Marian W. Moszoro

Warsaw School of Economics (SGH); International Monetary Fund (IMF); George Mason University - Department of Economics; George Mason University - Interdisciplinary Center for Economic Science (ICES)

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Date Written: October 16, 2010

Abstract

Opportunism, either governmental or private, may become a powerful deterrent against public-private project financing, especially considering the scale of the investment in infrastructure. The parties can however secure themselves against opportunism of the counter-party by assigning the investor an exit (put) option and the public agent a bail-out (call) option on the private investor’s shares. This paper presents a mechanism for converting natural monopolies into contestable markets using over-the-counter option contracts that combine the stability of long-term contracts and the flexibility of short-term contracts. The exit/bail-out option mechanism reduces entry barriers by streamlining incomplete long-term contracts and avoiding contractual problems related to bounded rationality and opportunism.

Keywords: Opportunism, Public-Private Partnerships, Infrastructure, Natural Monopolies, Contestable Markets, Exit and Bail-out Options, Game Theory

JEL Classification: C72, D23, D42, G32, G38, H54

Suggested Citation

Moszoro, Marian W., Opportunism in Public-Private Project Financing (October 16, 2010). Available at SSRN: https://ssrn.com/abstract=1693159 or http://dx.doi.org/10.2139/ssrn.1693159

Marian W. Moszoro (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
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International Monetary Fund (IMF) ( email )

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George Mason University - Department of Economics ( email )

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HOME PAGE: http://economics.gmu.edu/people/mmoszoro

George Mason University - Interdisciplinary Center for Economic Science (ICES) ( email )

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