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

See all articles by Daechang Kang

Daechang Kang

Korea Institute for International Economic Policy

Date Written: August 30, 2012

Abstract

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

Kang, Daechang, Optimal Contracts of Public-Private Partnerships with Demand Risk (August 30, 2012). Seoul Journal of Economics, Vol. 25, No. 3, pp. 255-277, 2012. Available at SSRN: https://ssrn.com/abstract=2141638

Daechang Kang (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)
+82-2-3460-1166 (Phone)
+82- 2-3460-1044 (Fax)

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