To Kill a Real Option: Incomplete contracts, real options and PPP

Publisher's full text
Niclas A Krüger

This paper is concerned with the implications of public-private partnership agreements for the execution of expansion options in road infrastructure. More specifically, it analyzes the expansion of an existing two-lane road in Sweden, and examines the real options created by an intermediate type of road with three lanes. Interpreting the results from real option analysis in the light of incomplete contract theory, this paper finds that external congestion costs might necessitate public ownership to ensure a social optimal outcome in public-private partnerships.

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