Bargaining-Based Profit Allocation Model for Fixed Return Investment Water-Saving Management Contract

Abstract

Fixed Return Investment (FRI) is one of the main operating modes of a Water-Saving Management Contract (WSMC). Aiming at the critical profit allocation of FRI WSMC projects, a new profit allocation model based on bargaining theory is proposed. First, the net present value is adopted to determine the profit interval to be allocated. Second, the bargaining process is divided into two levels. The first-level bargaining process is between a water user and an alliance, which consists of a Water Service Company (WSCO) and a financial institution. The second-level bargaining process is between the WSCO and the financial institution. Given the imbalance caused by offering first, the number of bargaining stages and sunk cost are introduced, and the equilibrium offers of the two parties in different bargaining stages are determined by using backward induction and mathematical induction. According to the feature that the number of bargaining stages is an integer in practice, the deterrence discount factors are introduced to redistribute the remaining part, and sixteen situations of profit allocation among participants are given. Third, the model analysis shows that the profit allocation of participants is closely related to the minimum profit requirements, deterrence discount factors, the number of bargaining stages, and sunk cost. Finally, the effectiveness of the model and the influence of various factors on profit allocation are verified by an example. The example shows that in the early stage of FRI WSMC, the water users enjoy more profits.