Share:


Incentive mechanism of government overcommitment in PPPs based on investors’ fairness preference

    Qi Luo Affiliation
    ; Jicai Liu Affiliation

Abstract

In public-private partnerships (PPPs), governments sometimes may not afford the guarantees in full as initially agreed upon due to limited fiscal budgets. Accordingly, government overcommitment can occur. The degree of government overcommitment fulfillment affects not only the incentives provided by governments but also investors’ willingness to cooperate and efforts. However, until now, this government overcommitment risk has been ignored during negotiations. Moreover, little attention has been paid to the impact of investors’ fairness preference. To this end, this paper constructs an incentive mechanism of government overcommitment based on investors’ fairness preference in the horizontal and vertical dimensions. The results show that the optimal strategies of both sides are usually affected by the degree of government overcommitment fulfillment, investors’ fairness preference and their willingness to cooperate. Contrary to intuition, the optimal incentive of governments and investors’ efforts do not always increase with the decreasing degree of government overcommitment fulfillment, and thus, fairness preferences should be considered. It is not always the case that a higher-level government overcommitment fulfillment is better for themselves. The findings contribute new insights to the incentive mechanism to innovatively work toward creating an effective contract to pay more attention to government overcommitment risk in advance in PPPs.

Keyword : public-private partnerships (PPPs), government overcommitment, incentive mechanism, fairness preference, willingness to cooperate

How to Cite
Luo, Q., & Liu, J. (2024). Incentive mechanism of government overcommitment in PPPs based on investors’ fairness preference. International Journal of Strategic Property Management, 28(1), 29–44. https://doi.org/10.3846/ijspm.2024.21028
Published in Issue
Mar 12, 2024
Abstract Views
215
PDF Downloads
197
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Buyukyoran, F., & Gundes, S. (2018). Optimized real options-based approach for government guarantees in PPP toll road projects. Construction Management and Economics, 36(4), 203–216. https://doi.org/10.1080/01446193.2017.1347267

Cao, Q., Sheng, Z., Zhou, J., & Liu, H. (2016). Research on multi-task and incentive mechanism of public-private partnerships based on fairness preference. Forecasting, 35(01), 75–80.

Carbonara, N., Costantino, N., & Pellegrino, R. (2014a). Concession period for PPPs: A win–win model for a fair risk sharing. International Journal of Project Management, 32(7), 1223–1232. https://doi.org/10.1016/j.ijproman.2014.01.007

Carbonara, N., Costantino, N., & Pellegrino, R. (2014b). Revenue guarantee in public-private partnerships: A fair risk allocation model. Construction Management and Economics, 32(4), 403–415. https://doi.org/10.1080/01446193.2014.906638

Chang, Y., & Wang, S. (2018). Profit allocation of PPP project from the perspective of incentives – The case of Chinese enterprises’ investment in the infrastructure projects of GMS countries under the support of Asian infrastructure investment bank. Management Review, 30(11), 257–265. https://doi.org/10.14120/j.cnki.cn11-5057/f.2018.11.024

Chen, H., Xu, Y., & Chi, M. (2021). Research on the impact of risk reallocation on private sector’s behavior in PPP projects – The multiple mediating effects of perceived justice. Management Review, 33(08), 53–65. https://doi.org/10.14120/j.cnki.cn11-5057/f.2021.08.005

Du, Y., Sun, N., & Ke, D. (2017). Perceived justice of the private in PPP Projects: Connotation definition and scales development. Journal of Chongqing University, 23(03), 52–62.

Fehr, E., & Schmidt, K. M. (1999). A theory of fairness, competition, and cooperation. The Quarterly Journal of Economics, 114(3), 817–868. https://doi.org/10.1162/003355399556151

Feng, Z., Zhang, S. B., & Gao, Y. (2015). Modeling the impact of government guarantees on toll charge, road quality and capacity for Build-Operate-Transfer (BOT) road projects. Transportation Research Part A: Policy and Practice, 78, 54–67. https://doi.org/10.1016/j.tra.2015.05.006

Gao, H., Hou, X., & Zhang, X. (2021). Government compensation mechanism for PPP based on risk preference and fairness preference. Operations Research and Management Science, 30(06), 191–197.

Gao, R., & Liu, J. (2019). Selection of government supervision mode of PPP projects during the operation stage. Construction Management and Economics, 37(10), 584–603. https://doi.org/10.1080/01446193.2018.1564347

Gao, Y., Zhang, S., & Feng, Z. (2015). PPP projects: A study of compensation mechanism with unmet demand. Journal of Industrial Engineering and Engineering Management, 29(2), 93–102.

Han, J., Jia, M., Wu, G., & Yang, H. (2020). Strategic interaction between the government and the private sector in PPP projects incorporating the fairness preference. IEEE Access, 8, 37621–37631. https://doi.org/10.1109/ACCESS.2020.2975821

He, H., Zhou, G., & Zheng, L. (2020). Income allocation of PPP project with user involvement from the perspective of incentives. Industrial Engineering and Management, 25(06), 126–134. https://doi.org/10.19495/j.cnki.1007-5429.2020.06.015

He, Y., Shi, L., & Li, Z. (2022). Early termination mechanism of public-private partnership transportation projects with government guarantee. Journal of Infrastructures Systems, 28(4), Article 04022037. https://doi.org/10.1061/(ASCE)IS.1943-555X.0000720

Holmstrom, B., & Milgrom, P. (1987). Aggregation and linearity in the provision of intertemporal incentives. Econometrica: Journal of the Econometric Society, 55(2), 303–328. https://doi.org/10.2307/1913238

Jin, H., Liu, S., Sun, J., & Liu, C. (2021). Determining concession periods and minimum revenue guarantees in public-private-partnership agreements. European Journal of Operational Research, 291(2), 512–524. https://doi.org/10.1016/j.ejor.2019.12.013

Jin, L., Zhang, Z., & Song, J. (2020). Profit allocation and subsidy mechanism for public-private partnership toll road projects. Journal of Management in Engineering, 36(3), Article 04020011. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000766

Li, H., Su, L., Zuo, J., Zhao, X., Chang, R., & Wang, F. (2022). Incentive mechanism for performance-based payment of infrastructure PPP projects: Coupling of reputation and ratchet effects. International Journal of Strategic Property Management, 26(1), 35–55. https://doi.org/10.3846/ijspm.2022.15969

Li, Y., & Xue, J. (2021). A study of risk sharing in PPP projects from the perspective of incomplete information – A case study based on different bidding orders of participants. Science Research Management, 42(06), 202–208. https://doi.org/10.19571/j.cnki.1000-2995.2021.06.024

Liu, J., Gao, R., Cheah, C. Y. J., & Luo, J. (2016). Incentive mechanism for inhibiting investors’ opportunistic behavior in PPP projects. International Journal of Project Management, 34(7), 1102–1111. https://doi.org/10.1016/j.ijproman.2016.05.013

Liu, J., Yu, X., & Cheah, C. Y. J. (2014). Evaluation of restrictive competition in PPP projects using real option approach. International Journal of Project Management, 32(3), 473–481. https://doi.org/10.1016/j.ijproman.2013.07.007

Luo, Q., Gao, R., Liu, J., & Li, Y. (2022). Path analysis on escalation of commitment of investors in different project scenarios of PPPs. International Journal of Strategic Property Management, 26(2), 127–140. https://doi.org/10.3846/ijspm.2022.16477

Quimbayo, C., Vega, C., & Marques, N. (2019). Minimum revenue guarantees valuation in PPP projects under a mean reverting process. Construction Management and Economics, 37(3), 121–138. https://doi.org/10.1080/01446193.2018.1500024

Song, J., Zhao, Y., Jin, L., & Sun, Y. (2018). Pareto optimization of public-private partnership toll road contracts with government guarantees. Transportation Research Part A: Policy and Practice, 117, 158–175. https://doi.org/10.1016/j.tra.2018.08.019

Su, L., Cao, Y., & Li, H. (2023). Performance-based payment structural design for infrastructure PPP projects. International Journal of Strategic Property Management, 27(2), 133–145. https://doi.org/10.3846/ijspm.2023.19180

Wang, X., Yuan, S., Lin, Z., Zhao, J., & Qin, Y. (2021). Research on incentive mechanism of PPP project under dual information asymmetry based on fair preference. Chinese Journal of Management Science, 29(10), 107–120. https://doi.org/10.16381/j.cnki.issn1003-207x.2019.0429

Wang, Y., & Gao, R. (2020). Risk distribution and benefit analysis of PPP projects based on public participation. International Journal of Strategic Property Management, 24(4), 215–225. https://doi.org/10.3846/ijspm.2020.12329

Wang, Y., & Hu, Y. (2019). Research on participation of private enterprises in PPP project – Risk analysis based on publicity. Soft Science, 33(6), 89–94. https://doi.org/10.13956/j.ss.1001-8409.2019.06.16

Wang, Y., & Liu, J. (2015). Evaluation of the excess revenue sharing ratio in PPP projects using principal-agent models. International Journal of Project Management, 33(6), 1317–1324. https://doi.org/10.1016/j.ijproman.2015.03.002

Wang, Y., Gao, H. O., & Liu, J. (2019). Incentive game of investor speculation in PPP highway projects based on the government minimum revenue guarantee. Transportation Research Part A: Policy and Practice, 125, 20–34. https://doi.org/10.1016/j.tra.2019.05.006

Wang, Y., Liu, J., Gao, R., & Hwang, B. G. (2020). Government subsidies in public-private partnership projects based on altruistic theory. International Journal of Strategic Property Management, 24(3), 153–164. https://doi.org/10.3846/ijspm.2020.11545

Wang, Z., Liu, N., Ding, J., & An, X. (2018). Analysis on excess income distribution of PPP traffic project based on fairness concern of the subject. Resource Development and Market, 34(10), 1333–1334. https://doi.org/10.3969/j.issn.1005-8141.2018.10.001

Wu, X., Wu, S., & Liu, X. (2019). Analysis of private investment decision-making in PPP project based on fairness preference under governmental compensation. Journal of Beijing Institute of Technology (Social Sciences Edition), 21(05), 115–124. https://doi.org/10.15918/j.jbitss1009-3370.2019.2433

Yan, X., Chong, H. Y., Zhou, J., & Li, Q. (2019). Concession model for fair distribution of benefits and risks in build-operate-transfer road projects. Journal of Civil Engineering and Management, 25(3), 265–275. https://doi.org/10.3846/jcem.2019.8649

Yan, X., Chong, H. Y., Zhou, J., Sheng, Z., & Xu, F. (2020). Fairness preference based decision-making model for concession period in PPP projects. Journal of Industrial and Management Optimization, 16(1), 11–23. https://doi.org/10.3934/jimo.2018137

Yuan, J., Li, W., Xia, B., Chen, Y., & Skibniewski, M. J. (2019). Operation performance measurement of public rental housing delivery by PPPS with fuzzy-AHP comprehensive evaluation. International Journal of Strategic Property Management, 23(5), 328–353. https://doi.org/10.3846/ijspm.2019.9820

Zhang, Z., Jia, M., & Wan, D. (2009). Theoretical study on the efficient allocation of control rights in the public-private partnership (PPP). Journal of Industrial Engineering and Engineering Management, 23(3), 23–29.