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Optimal Contracts of Public-Private Partnerships with Demand Risk
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- Authors
- Issue Date
- 2012-07
- Citation
- Seoul Journal of Economics, Vol.25 No.3, pp. 255-278
- Abstract
- The paper analyzes the service provision of infrastructure from the
aspect of demand risk sharing. The society benefits more under the
public-private partnership (PPP) than under government operation,
because the government can transfer some risks to private firms
through PPP. To reduce total cost, the government is more likely to
apply PPP to projects with large risk factors. Using a two-period model,
the paper examines the dynamic features of the optimal contract under
the PPP. The optimal incentive scheme should be stronger during
the second than the first period. As the performance target becomes
lower, the incentive power increases in both periods with a higher
increase in the first period. As the intertemporal externality becomes
stronger, the incentive power increases in both periods with a higher
increase in the second period. As the risk or risk aversion increases,
the incentive power decreases in both periods, which resembles the
static feature.
- ISSN
- 1225-0279
- Language
- English
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