Optimal incentives to early exercise of public-private partnership investments under constrained growth

This paper analyzes how certain incentives given to private concessionaires, in publicprivate partnerships, should be optimally determined to promote immediate investment, in a real options framework. Our model extends previous real options models, by considering that investment cost is lower than the project value only up to a certain demand level. This constrained growth model, while having the same trigger value, that induces investment, when it occurs before the maximum growth level, shows that investment may only be optimal after demand is above that level. We show how investment subsidies, revenue subsidies and a minimum demand guaranty should be optimally arranged to make the option to defer worthless. These three types of incentives produce significantly different results when we compare the value of the project after the incentive is established and the moment when the related cash flows occur. We acknowledge the support of the Portuguese Foundation for Science and Technology Project PTDC/GES/78033/2006. Corresponding author. E-mail: [email protected]. Phone: +351 253 604 100 Ext. 5553, Fax:+351 253 601 380 Optimal incentives to early exercise of public-private partnership investments under constrained growth