MORAL HAZARD IN PFI PROJECTS

Abstract

This paper examines the roles of guarantees and monitoring systems to conquer moral hazard issues in PFI (Private Financial Initiative) projects. The moral hazard is classified into two types: technological and financial ones. The guarantees can deter moral hazard, but generates financial inefficiency caused by opportunity costs. The monitoring systems are valid for the deterrence of the financial moral hazard. The paper concludes the combination of the guarantee and monitoring systems end up with the efficient means to resolve the moral hazard issues, as far as the monitoring costs are sufficiently low.