Credible Commitments: Using Options to Support Partnerships

30 Pages Posted: 22 Dec 2010 Last revised: 31 Dec 2012

See all articles by Marian W. Moszoro

Marian W. Moszoro

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

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Date Written: December 30, 2012

Abstract

Opportunism --- either governmental hold-up by unfair regulation and expropriation, or private monopoly pricing and investment and quality curbing --- is a powerful deterrent from successful-to-be public-private partnerships with large sunk investments and welfare externalities. The agents can overcome this double-sided moral hazard by exchanging an exit (put) option for the investor and a bail-out (call) option for the public agent on the investor's outlay. The exit/bail-out option mechanism increases the set of payoffs by offsetting deviation, and thus facilitates cooperation. The mechanism is applicable to other settings with partially aligned goals and informational asymmetries.

Keywords: Noncooperative Games, Opportunism, Exit and Bail-out Options, Public-Private Partnerships, Contestable Markets

JEL Classification: C72, D23, G32, H54, L32

Suggested Citation

Moszoro, Marian W., Credible Commitments: Using Options to Support Partnerships (December 30, 2012). IESE Business School Working Paper No. 887. Available at SSRN: https://ssrn.com/abstract=1729652 or http://dx.doi.org/10.2139/ssrn.1729652

Marian W. Moszoro (Contact Author)

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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Warsaw School of Economics (SGH) ( email )

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