Dynamic Reputation Incentive Mechanism for Urban Water Environment Treatment PPP Projects

Abstract

New approaches are provided for urban water environment treatment projects (UWETP) with the development and application of the public-private partnership (PPP) model. However, an asymmetry of information and conflicts of interest exists between the government and the private sector. The moral hazard and the opportunistic behaviors of the private sector present significant challenges to the operational efficiency of UWETP-PPP. To encourage the private sector to operate UWETP-PPP with its real capability and further improve and supplement the incentive contracts, the reputation theory is introduced in this study to design the incentive mechanism of UWETP-PPP in a contract to integrate short-term incentives with long-term incentives and finally to realize a win-win situation between two parties. The main contributions of this paper are as follows: (1) A two-period dynamic incentive model for UWETP-PPP is constructed by introducing a reputation mechanism. (2) The effective conditions for exerting the reputation incentive effects are explored to realize the government’s effective incentive to the private sector. (3) The incentive effects of the explicit and implicit reputation incentive on the private sector are analyzed, and the incentive models with and without reputational concerns are compared. (4) The change rules of the private sector’s effort level and marginal incentive coefficient with the change in related variables that affect the model are revealed. The incentive contract of UWETP-PPP can be optimized using the proposed dynamic reputation incentive mechanism. This paper will be of interest to academics and practitioners concerned with the design of incentive contracts.