Opportunism in Public-Private Project Financing
30 Pages Posted: 17 Oct 2010 Last revised: 14 Oct 2013
Date Written: October 16, 2010
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: Suggested Citation