Financing Infrastructure in the Shadow of Expropriation.

This article analyzes the optimal financing of infrastructure projects under a double moral hazard framework, where private sector operators require incentives to exert effort, and governments have incentives to expropriate project returns, thereby limiting private investment. The model incorporates three key players—government, private operators, and financiers—and shows that government guarantees to financiers are essential to incentivize governments not to expropriate, improving project quality and expanding investment scale. It further demonstrates that government coinvestment, tax subsidies, and allocation of development rights are integral features of optimal contracts, with their use depending on the severity of moral hazards and fiscal capacity. Empirical evidence from infrastructure projects in India and other countries supports the presence of double moral hazard, and the study highlights differences in infrastructure financing between developed and developing economies, emphasizing the role of institutional quality and government fiscal resources.