The optimality of public–private partnerships under financial and fiscal constraints

Abstract

The government may delegate two sequential tasks (e.g., building and operating an infrastructure) to the same or different agents (i.e., partnership vs. sequential contracts). Agents are risk‐neutral but face financial constraints, whereas the government's contractual capacity may be limited by the renegotiation‐proofness and fiscal constraints. By relying on history‐dependent incentives, the partnership contract corrects moral hazard more effectively than sequential contracts. Thus, it is socially preferred unless bundling different tasks deteriorates the agent's financial conditions. Our results shed new light on the role of firms' financial and government's fiscal conditions in driving the cost–benefit analysis of public–private partnerships.