Excess returns in Public-Private Partnerships: Do governments pay too much?. (No. 0246). Dipartimento di Scienze Economiche” Marco Fanno”.
We study the optimal design of Public-Private Partnerships (PPPs) when there is unobservable action on the private party’s side. We show that if the private party does not have negotiating power over the project’s surplus, no inefficient delays are attributable to the moral hazard issue. However, if the private party has negotiating power, the first-best timing is not guaranteed. This time discrepancy is shown to be costly in terms of overall project efficiency. The explicit consideration of the private party’s negotiating power can explain empirical evidence showing that private parties in PPPs reap excess returns.