Contracting and renegotiating with a loss-averse private firm in BOT road projects

In built-operate-transfer (BOT) road project, the government offers a firm an ex ante contract, which specifies toll price and concession period based on the forecasted demand. When the demand states are observed in the operation period, the government may request renegotiation to adapt the initial contract to the realized demand state. By considering the loss aversion behavior of the private firm, this paper shows that renegotiation takes place only if the private firm’s extent of loss aversion is sufficiently small. However, in what direction the government adjusts toll price and concession period depends on the combined effects of initial price, demand level, and demand uncertainty in each demand state. This paper has further investigated the optimal initial contract. The authors find that if one demand state realizes with a sufficiently large probability, then the optimal initial contract is renegotiation-proof in this demand state while inducing renegotiation in other demand states; if all demand states realize with almost equal probabilities, whether the optimal initial contract prevents or induces renegotiations in all demand states depends on the private firm’s extent of loss aversion. This paper makes two major contributions to the literature. First, the authors apply loss aversion to the context of renegotiation in BOT road projects and show that renegotiation is costly. Second, they consider the optimal initial contract in anticipation of ex post renegotiation and show that the government should trade off between ex ante social welfare and ex post psychological loss. To obtain more insights and to strengthen their model results, the authors have reexamined the optimal renegotiation and initial contracts under some relaxed assumptions.

• Record URL:
  • https://doi.org/10.1016/j.trb.2018.04.004
• Record URL:
  • http://www.sciencedirect.com/science/article/pii/S019126151730958X
• Availability:
  • Find a library where document is available. Order URL: http://worldcat.org/issn/01912615
• Supplemental Notes:
  • Abstract reprinted with permission of Elsevier.
• Authors:
  • Feng, Zhuo
  • Zhang, Yiwen
  • Zhang, Shuibo
  • Song, Jinbo
• Publication Date: 2018-6

Language

• English

Media Info

• Media Type: Web
• Features: Appendices; Figures; References; Tables;
• Pagination: pp 40-72
• Serial:
  • Transportation Research Part B: Methodological
  • Volume: 112
  • Issue Number: 0
  • Publisher: Elsevier
  • ISSN: 0191-2615
  • Serial URL: http://www.sciencedirect.com/science/journal/01912615

Subject/Index Terms

• TRT Terms: Build operate transfer; Contracting; Road construction
• Uncontrolled Terms: Loss aversion; Renegotiations
• Subject Areas: Administration and Management; Construction; Highways;

Filing Info

• Accession Number: 01670329
• Record Type: Publication
• Files: TRIS
• Created Date: May 29 2018 10:21AM