Transaction Costs in Public-Private Partnerships: The Weight of Institutional Quality in Developing Countries Revisited

Unlike the case of private hybrid organizational structures, the institutional dimension in a public-private partnership (PPP) is no longer exogenous to the decisions of the partners in a transaction. The public partner, in this type of contract, acts also as regulator and arbitrator when the regulatory bodies and the courts are subject to government influence. This article explores the impact of institutional quality on the expansion of PPP markets in developing countries. The analysis expands on Crocker and Masten's construct for choosing an appropriate organizational structure for the provision of public services. Institutional quality becomes a source of transaction costs on a par with asset specificity and uncertainty, on one hand, and, on the other, it affects the magnitude of the impact of an exogenous unforeseen event. Panel regressions, on a sample of 83 developing countries for the period 1999-2011, provide evidence on the positive impact of judicial independence and regulatory quality in attracting private investors to PPP markets regardless of the degree of uncertainty in the exchange environment.