DP15288 Financing Infrastructure in the Shadow of Expropriation
We examine the optimal financing of infrastructure when governments have limited financial commitment
and can expropriate rents from private sector firms that manage infrastructure. While private
firms need incentives to implement projects well, governments need incentives to limit expropriation.
This double moral hazard limits the willingness of outside investors to fund infrastructure projects. Optimal
financing involves government guarantees to investors against project failure to incentivize the
government to commit not to expropriate which improves private sector incentives and project quality.
The model captures several other features prevalent in infrastructure financing such as government
co-investment, tax subsidies, development rights, and cross-guarantees.