A Game Theory Approach for the Risk Analysis of Project Finance in China

Abstract

In China, project finance is still in an exploratory stage. Generally speaking, in practice as well as in literature there is a considerable gap between China and Western developed countries. Therefore, how to push forward and improve project finance in theory as an academic guidance needs urgent explorations. In the light of China's unique features, this paper, with the help of the game theory, has an overall analysis to the risks and solve the problem of how to make decisions under asymmetric information. Firstly, a game model based on game theory is established. Then the paper deeply analyzes the decision-making behaviors according to two different cases: under idealized condition and under asymmetric information condition. It is found that, in the latter case, it is imperative for project operators to minimize the risks of project sponsors and investors. Moreover, it is extremely difficult to choose suitable operators for the projects. In conclusion, several relative suggestions and recommendations are put forward in order to control or avoid risks under asymmetric information.