Abstract
In the planning stage of build-operate-transfer (BOT) highway projects, private firms usually possess more information about the investment cost than governments. This study considers the problem of how to design project contracts and regulate private firms whose investment costs are unobservable to governments. A principal-agent model is proposed to investigate this type of BOT contracts, in which governments aim to maximize social welfare, while the firms are guaranteed a reserved level of profit and have no incentive to misreport their costs. Besides, the extent to which the information asymmetries influence these contracts is examined, through an analysis of the effects of the distribution of marginal cost parameters and the shadow cost of public funds. Furthermore, properties of these contracts are discussed and compared with the revenue-compensated BOT contracts under symmetric cost information.
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