Optimal subsidies and guarantees in public–private partnerships |
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Authors: | Manuel J Rocha Armada Paulo J Pereira |
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Institution: | 1. School of Economics and Management , University of Minho , Braga , Portugal;2. CEF.UP and Faculdade de Economia , Universidade do Porto , Porto , Portugal |
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Abstract: | In this paper, we analyse how certain subsidies and guarantees given to private firms in public–private partnerships should be optimally arranged to promote immediate investment in a real options framework. We show how an investment subsidy, a revenue subsidy, a minimum demand guarantee, and a rescue option could be optimally arranged to induce immediate investment, compensating for the value of the option to defer. These four types of incentives produce significantly different results when we compare the value of the project after the incentive structure is devised and also when we compare the timing of the resulting cash flows. |
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Keywords: | option to defer early exercise incentives public–private partnerships |
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