Study of risk allocation in ppp projects based on altruistic theory

Abstract

In PPP (Public-Private Partnership) projects, a reasonable risk-sharing system determines whether project financing will be successful. As “economic men” with limited rationality, both the government and the investors have altruistic preferences during cooperation, and their behaviors and incentive strategies can be explained and designed by the principal-agent theory. In order to study how project participants' altruistic preferences affect risk distribution, this paper developed a risk allocation model based on the principal-agent theory. The study shows that the risk sharing ratio is related to the players' altruistic preferences, the expected revenue, costs and efforts facing the investors. We find that government's altruism actually undermines investors' enthusiasm in cooperation and the risk sharing propensity, although it increases the utilities of both parties.