Opportunism-Focused Transaction Cost Analysis of Public-Private Partnerships

Abstract

While the higher efficiency due to better pooling of resources is greatly emphasized in public–private partnerships (PPPs), the embedded transaction inefficiencies are often understated or even ignored. Through the lens of transaction cost economics (TCE), this paper aims to answer why and when PPPs may become a costly governance structure. Specifically, the authors develop a TCE-based theory of PPPs as a governance structure. This theory suggests that three major opportunism problems embedded in infrastructure PPPs are possible to cause substantial transaction costs and render PPPs a costly governance structure. The three main opportunism problems are principal–principal problem, firm’s hold-up problem, and government-led hold-up problem. Moreover, project and institutional characteristics that may lead to opportunism problems are identified. Based on these characteristics, an opportunism-focused transaction cost analysis (OTCA) of PPPs as a governance structure is proposed to supplement the current practice of PPP feasibility analysis. As a part of theory development, a case study of the channel tunnel is performed to evaluate the proposed theory and to illustrate how the proposed OTCA can be applied in practice. Policies and administration strategies for infrastructure PPPs are derived based on the proposed theory.