COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1618

The Basic Public Finance of Public-Private Partnerships

Eduardo Engel, Ronald Fischer and Alexander Galetovic

July 2007
Revised February 2008

Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are justified on efficiency grounds, the contract that optimally balances demand risk, user-fee distortions and the opportunity cost of public funds, features a minimum revenue guarantee and a revenue cap. However, observed revenue guarantees and revenue sharing arrangements differ from those suggested by the optimal contract. Also, this contract can be implemented via a competitive auction with realistic informational requirements. Finally, the allocation of risk under the optimal contract suggests that PPPs are closer to public provision than to privatization.


Keywords: Bundling, Cost of public funds, Demsetz auction, Minimum revenue guarantees, Privatization, Revenue and profit caps, Scope of government, Subsidies

JEL Classification: H21, H54, L51, R42