How to design infrastructure contracts in a warning world: a critical appraisal of public-private partnerships
Journal article: We analyze how long-term uncertainty, for example, regarding future climate conditions, affects the design of concession contracts and organizational forms in a principal–agent context, with dynamic moral hazard, limited liability, and irreversibility constraints. The prospect of future, uncertain productivity shocks on the returns on the firm's effort creates an option value of delaying efforts, a course that exacerbates agency costs. Contracts and organizational forms are drafted to control this cost of delegated flexibility. The possibility for the agent to delay investment in response to uncertainty and irreversibility also elicits preference for unbundling different stages of the project through short-term contracts. Our analysis is relevant to infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of public–private partnerships in this context.
Author(s)
David Martimort, Stephane Straub
Journal
- International Economic Review
Date of publication
- 2016
Keywords
- Concession contracts
Pages
- 61–88
URL of the HAL notice
Version
- 1
Volume
- 57