Do exit options increase the value for money of public–private partnerships?

We study the effects of granting an exit option allowing private party to terminate a Public–Private Partnerships contract early if it turns out be loss-making. In continuous-time setting with hidden information about returns on investment, we show that option, acting as risk-sharing device, can soften agency problems and, in so doing, spur investment and increase government's expected payoff, even while taking into account costs public sector will have meet future resume project.