Capital budgeting under relational contracting: optimal ranking and duration criteria for schemes of concession, project-financing and public-private partnership

Abstract

Project-financing and public-private partnership schemes are joint projects of investment that are generally submitted to investment valuation criteria based on compound discounting. However, the theoretical basis of these criteria is at issue nowadays. According to recent studies on relational contracting economics and behavioral finance, joint projects of investment can be considered as special relational environments where the project's returns improve on alternative replacement opportunities. This article aims to bridge the gap between new theories and widespread valuation techniques by providing a generalised approach to investment valuation. This article suggests new valuation criteria that fit those theoretical developments, including an endogenous optimal duration that the project's contractual agreement may integrate.discounting; investment decision criteria; capital budgeting; project finance and public private partnerships; endogenous optimal duration; cost of capital for government