Optimal Contracts of Public-Private Partnerships with Demand Risk
Seoul Journal of Economics, Vol. 25, No. 3, pp. 255-277, 2012
24 Pages Posted: 5 Sep 2012
Date Written: August 30, 2012
The paper analyzes the service provision of infrastructure from the aspect of demand risk sharing. The society benefits more under the public-private partnership (PPP) than under government operation, because the government can transfer some risks to private firms through PPP. To reduce total cost, the government is more likely to apply PPP to projects with large risk factors. Using a two-period model, the paper examines the dynamic features of the optimal contract under the PPP. The optimal incentive scheme should be stronger during the second than the first period. As the performance target becomes lower, the incentive power increases in both periods with a higher increase in the first period. As the intertemporal externality becomes stronger, the incentive power increases in both periods with a higher increase in the second period. As the risk or risk aversion increases, the incentive power decreases in both periods, which resembles the static feature.
Keywords: public-private partnerships, incentive, risk sharing, intertemporal externality
JEL Classification: D8, H54, H57, L5
Suggested Citation: Suggested Citation