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Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships

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  • Daniel Danau
  • Annalisa Vinella

Abstract

A public‐private partnership requires specialized expertise during construction of an infrastructure. Construction completion is costlier if the firm invests more upfront and if the government replaces the firm beforehand; more investment makes the operating cost more likely to be low. With a renegotiation‐proof contract, the government lessens moral hazard, unless this is severe or the incentives to renege in mid‐construction are strong. In these cases, it is less costly to motivate the parties to execute, in operation, a contract that was renegotiated in mid‐construction. Thus, the government offers a contract which leads to renegotiation in mid‐construction to secure more investment.

Suggested Citation

  • Daniel Danau & Annalisa Vinella, 2021. "Under/Over‐Investment and Early Renegotiation in Public‐Private Partnerships," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 923-966, December.
    • Handle: RePEc:bla:jindec:v:69:y:2021:i:4:p:923-966
    DOI: 10.1111/joie.12280
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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