To kill a real option – Incomplete contracts, real options and PPP

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.

► With incomplete contract theory and real options we study optimal ownership in PPP.
► Ownership of the road determines which party decides when contract is incomplete.
► Unforeseen future congestion costs might necessitate early expansion.
► Private company ownership might lead to late expansion from societal standpoint.
► Risk-sharing via PPP might lead to the transfer of option values between parties.