Do exit options increase the value-for-money of public-private partnerships?

We study the effects of granting an exit option allowing the private party to terminate a Public–Private Partnerships contract early if it turns out to be lossmaking. In a continuous‐time setting with hidden information about the private returns on investment, we show that an exit option, acting as a risk sharing device, can soften agency problems and, in so doing, spur investment and increase the government's expected payoff, even while taking into account the costs that the public sector will have to meet in the future to resume the project.