Public-Private Partnerships in Infrastructure: A Nash Bargaining Analysis

Public-private partnership (PPP) is a form of government procurement where a private entity (firm) provides upfront funding to construct a major public infrastructure project. After the project is completed, the firm collects payments from end consumers who use the project to recoup the construction cost and generate a profit. Due to the enormous expense of infrastructure projects, the government and the firm often entertain intense negotiations on the subject of the construction and compensation details. However, existing literature has not studied the impact of negotiations on the outcome of the final PPP agreement. We solve for the Nash bargaining outcome between the government and the firm under PPP, and compare it to the traditional procurement where the government provides upfront funding for the project from its operating budget. The firm wants to maximize profit while the goal of the government is to maximize social welfare which typically includes consumer surplus and public revenue. We find that when public revenue accounts for a large proportion of the government's objective function, PPP can lead to a win-win situation for the government and the firm, compared to traditional procurement. In contrast, when the government's goal is to mainly maximize consumer surplus, PPP can result in a lose-lose outcome. However, in this case, the government can utilize subsidies (provided to either the firm or the end consumers) to attain a desired bargaining outcome under PPP. Our results are useful for informing policy makers of instances when PPP is better than traditional procurement and when government subsidies should be provided.