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Government guarantees and risk sharing in public–private partnerships

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  • Ryuta Takashima
  • Kyoko Yagi
  • Hiroshi Takamori

Abstract

We study the interaction between a private firm and a government when they time an investment decision while in a public–private partnership. We use a real options framework and consider the degree of sharing in the cost of the investment and the risk in the operation of the project. The degree of sharing influences the investment timing and the project value. When the guarantee of the government is large and/or the cost sharing rate for the private firm is low, then the private firm‐maximizing policy exercises the investment option earlier than the project value‐maximizing policy.

Suggested Citation

  • Ryuta Takashima & Kyoko Yagi & Hiroshi Takamori, 2010. "Government guarantees and risk sharing in public–private partnerships," Review of Financial Economics, John Wiley & Sons, vol. 19(2), pages 78-83, April.
    • Handle: RePEc:wly:revfec:v:19:y:2010:i:2:p:78-83
    DOI: 10.1016/j.rfe.2009.10.001
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    References listed on IDEAS

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    1. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Francis Ng & Hans Bjornsson, 2004. "Using real option and decision analysis to evaluate investments in the architecture, construction and engineering industry," Construction Management and Economics, Taylor & Francis Journals, vol. 22(5), pages 471-482.
    4. Mauer, David C. & Sarkar, Sudipto, 2005. "Real options, agency conflicts, and optimal capital structure," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1405-1428, June.
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    Cited by:

    1. Han Xu, 2023. "Does government support affect private partners’ profitability in public–private partnerships? Evidence from China," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-10, December.

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