Tournament incentive mechanisms based on fairness preference in large-scale water diversion projects

Abstract

Large-scale water diversion project has the characteristics of linear distribution and is usually conducted simultaneously by multiple contractors. A typical principal-agent relationship exists between the project owner and each contractor involved in executing the project. Due to the asymmetry of information and the different interest goals of the owner and contractors, the contractors are likely to engage in opportunistic behavior. This can have a seriously negative effect on the interests of the project owner and the public. In order to solve this problem and optimize contractors’ effort levels, this paper establishes a tournament incentives model operating under the existence of contractors’ fairness preferences, based on the principle-agent theory in the large-scale water diversion project. Also, a tournament incentives compensation distribution scheme is designed. The scheme is based on each agent’s ranking and degree of fairness preference. The results show that multiple contractors will be more inclined to put forth optimal effort after tournament incentives mechanism is introduced. Moreover, contractors’ optimal effort levels will increase as the degree of the incentive compensation gap between the two contractors increases. The study finds that the incentive coefficient for both top-ranked and second-ranked contractors should increase in line with corresponding increases in fairness preference degrees. This method will help to ensure that contractors put forward their optimal effort level, indirectly causing an increase in the total output performance of a large-scale water diversion project, thus achieving a win-win situation. Finally, the study’s conclusions are verified through a research study. The findings offer new insights for the development of stakeholder management between the owner and multi-contractor in large-scale water diversion projects.