Incentive game of investor speculation in PPP highway projects based on the government minimum revenue guarantee

Abstract

Mechanisms for risk sharing are critical in infrastructure project financing. In public-private partnerships (PPP) for highway projects, provision of guarantees by the government to the investors is an important risk-sharing scheme. Because the government does not have the same information that private investors have, information asymmetry leads to speculation. In this paper, investors grab minimum revenue guarantee by deliberately reducing in earnings is identified as a moral hazard. To solve this problem, a game theory model for studying mechanisms that encourage/incentivize investors to adopt a positive attitude toward cooperation with the government is established. In particular, we design incentive mechanisms that engage private investors based on their profitability outlook. The results show that blindly increasing the amount of a reward or a penalty is not an effective way to guide an investor’s behavior. Adopting flexible incentive mechanisms during different stages of a project proves effective in influencing investors’ willingness to cooperate with the government as well as in maximizing the benefits they realize from the project.