Stéphane STRAUB (Toulouse School of Economics)
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How to Design Public-Private Partnerships in a Warming World?
David Martimort (PSE-EHESS) & Stéphane Straub (TSE, ARQADE & IDEI)
Abstract: This paper analyzes how the deep current scientific uncertainty regarding future climate conditions affects the design of Public Private Partnerships (PPPs) contracts, especially in infrastructure sectors that are highly sensitive to such changing weather conditions. We show that, consistently with the literature on uncertainty and irreversibility,the prospect of future, uncertain productivity shocks creates an option value of delaying investments, which is exacerbated in an agency context where this investment is delegated to the private sector. We study how public authorities may structure long-term contracts to minimize the agent’s adverse incentives, under different assumptions on their commitment power. We also establish that strong future uncertainty may induce the agent to optimally adopt a more costly technology, if it increases flexibility to adapt to bad environmental shocks, but that the process of technological change will be slowed down if the principal is unable to commit.