Information Asymmetry in Renegotiation of Public–Private Partnership Projects

Abstract

Public–private partnerships (PPPs) use long-term contracts between the government and the private-sector partner to deliver public infrastructure or service. Due to unexpected contingencies, renegotiations have been common in PPP projects and significantly influenced efficiencies. In the renegotiation game, the private contractor has to decide whether to initiate a renegotiation or not, while the government has to decide whether to accept a renegotiation or not. The criteria for each to make such decisions are private, which causes information asymmetry. This study proposes a game theoretical model to study the influence of information asymmetry on the decision making of renegotiations in PPP projects. It is shown that the renegotiation decision making considering information asymmetry is a Bayesian game, and thus Bayesian Nash equilibrium is applied for solutions. This study provides the decision-making rules for renegotiations, identifies the opportunistic behaviors of players, and improves the renegotiation game through eliminating information asymmetry. The results show that (1) the private contractor can achieve the best outcome by sharing its private information with the government, (2) the government is willing to share its private information with the private contractor only if it has been informed of the private contractor’s private information, and (3) the sharing of the government’s private information will not increase the payoffs of either player. Different from previous studies, the proposed model in this study for the first time takes into consideration the information asymmetry in renegotiations of PPPs, thus contributing to the body of knowledge. In addition, the findings of this study help enhance the decision making of renegotiations, thereby contributing to practice.