IESE Research Papers
No D/887:
Opportunism in public-private project financing
Marian Moszoro ()
Abstract: Opportunism, either governmental or private, may become a
powerful deterrent against public-private project financing, especially
considering the scale of the investment in infrastructure. The parties can
secure themselves against counterparty opportunism by assigning the
investor an exit (put) option and the public agent a bail-out (call) option
on the private investor's shares. This paper presents a mechanism for
converting natural monopolies into contestable markets using
over-the-counter option contracts that combine the stability of long-term
contracts and the flexibility of short-term contracts. The exit/bail-out
option mechanism reduces entry barriers by streamlining incomplete
long-term contracts and avoiding contractual problems related to bounded
rationality and opportunism.
Keywords: Opportunism; Public-Private Partnerships; Infrastructure; Natural Monopolies; Contestable Markets; Exit and Bail-out Options; Game Theory; (follow links to similar papers)
JEL-Codes: C72; D23; D42; G32; G38; H54; (follow links to similar papers)
27 pages, October 15, 2010
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