Institutional Quality, Investment Efficiency and the Choice of Public-Private Partnerships

Abstract

By using a sample of 625 Public-Private Partnership (PPP) private sector firms that covers the years from 1980 to 2015 and straddles nine countries at varying degrees of economic development and PPP markets, we find that the motivation of the firms that undertake PPP investments varies. While private sector firms in economies with low institutional quality opt for PPPs to alleviate capital constraints attributed to underinvestment, those in economies with high institutional quality opt for PPPs to solve the problem of overinvestment caused by abundant cash flow. In the long run, the benefits of lower capital constraints through PPP investments are more pronounced in the economies with high institutional quality. Hence, our paper contributes to the extant debate on the role of institutional quality by stating that the “law-finance-growth” hypothesis is more plausible than the “political tie” hypothesis for understanding why private sector firms undertake PPP investments.

Keywords: Public-Private Partnerships, institutional quality, investment-cash flow sensitivity

JEL Classification: G31, G32, G38