Validity of generalized compensation contract for PPP project with consideration of private fair reference depending on concession profit
China Finance Review International
ISSN: 2044-1398
Article publication date: 10 January 2018
Issue publication date: 14 February 2018
Abstract
Purpose
The purpose of this paper is to analyze the effects of private investor's fair preference on the governmental compensation mechanism based on the uncertainty of income for the public-private-partnership (PPP) project.
Design/methodology/approach
Based on the governmental dilemma for the compensation of PPP project, a generalized compensation contract is designed by the combination of compensation before the event and compensation after the event. Then the private investor's claimed concession profit is taken as its fair reference point according to the idea of the BO model, and its fair utility function is established by improving the FS model. Thus the master-slave counter measure game is applied to conduct the behavior modeling for the governmental compensation contract design.
Findings
By analyzing the model given in this paper, some conclusions are obtained. First, the governmental optimal compensation contract is fair incentive for the private investor. Second, the private fair preference is not intuitively positive or negative related to the social efficiency of compensation. Only under some given conditions, the correlation will show the consistent effect. Third, the private fair behavior’s impact on the efficiency of compensation will become lower and lower as the social cost of compensation reduces. Fourth, the governmental effective compensation scheme should be carried out based on the different comparison scene of the private claimed portfolio profit and the expected revenue for the project.
Originality/value
This study analyzes the effects of private investor's fair preference on the validity of governmental generalized compensation contract of the PPP project for the first time; and the governmental generalized compensation contract designed in this study is a pioneering and exploratory attempt.
Keywords
Acknowledgements
The author would like to thank the anonymous reviewers for their valuable comments and suggestions. This study was supported by the General Program of National Natural Science Foundation of China (Grant Nos 71571099, 71471084, 71671080 and 71271112), the Youth Program of National Natural Science Foundation of China (Grant Nos 71701090, 71301073, 71301070, 71602084 and 71602083), and the Postdoctoral Science Foundation of China (Grant No. 2012M521053).
Citation
Wu, X., Peng, Y., Liu, X. and Zhou, J. (2018), "Validity of generalized compensation contract for PPP project with consideration of private fair reference depending on concession profit", China Finance Review International, Vol. 8 No. 1, pp. 43-68. https://doi.org/10.1108/CFRI-06-2016-0071
Publisher
:Emerald Publishing Limited
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