Government guarantees and risk sharing in public–private partnerships

We study the interaction between a private firm and a government when they time an investment decision while in a public–private partnership. We use a real options framework and consider the degree of sharing in the cost of the investment and the risk in the operation of the project. The degree of sharing influences the investment timing and the project value. When the guarantee of the government is large and/or the cost sharing rate for the private firm is low, then the private firm‐maximizing policy exercises the investment option earlier than the project value‐maximizing policy.