Cooperative Behavior, Supervision, and Contract Choice in PPP Projects: An Evolutionary Game Theory Approach Incorporating an Other-Regarding Preference

Abstract

Rigid and flexible contracts, both of which have advantages and disadvantages, are widely used in public–private partnership (PPP) projects. How to choose an appropriate contract type to improve the performance of PPP projects is an important issue that governments need to address. The literature has focused mainly on the strategy evolution of governments and private investors under rigid contracts but has not considered the influence of contract type (rigid versus flexible) on their strategy evolution. In this study, by incorporating an other-regarding preference, evolutionary game models under rigid and flexible contracts in PPP projects are established. We compare the government’s supervision strategy and the private investor’s cooperation strategy under these two types of contracts and summarize the applicable situations. Our research results show that the type of contract (rigid or flexible) will not affect the government’s supervision strategy but will affect the cooperative strategy of the private investor. The applicable conditions of these two types of contracts are determined by profit sharing, the government’s expectation of the project performance, and the discount rate as well as other factors. There is no cross-influence between the government and private investor’s other-regarding preferences. The private investor’s other-regarding preference is conducive to reducing some opportunistic behaviors that cause damage to social welfare and in promoting cooperative behavior. This paper contributes to the literature on PPP project contract design by providing the applicable conditions for rigid and flexible contracts as well as contract choice suggestions for project managers in PPP projects. Choosing a proper contract type is important for the success of PPP projects. This study compares the strategy choices of government and private investors under rigid and flexible contracts, presents the applicability of those two contracts, and provides managerial insights and suggestions for the government to choose a suitable contract type and enhance project performance. First, for projects with small-scale or easy tasks for which private investors need to expend only a low level of effort, the government can pay less attention to the contract type. Second, for projects that have high prospects, i.e., will have high performance in the future (for example, infrastructure PPP projects in cities’ core areas), a flexible contract outperforms a rigid contract. Otherwise, a rigid contract outperforms a flexible one. Third, governments should pay more attention to the preliminary feasibility study of a project to avoid either over- or underconfidence and ensure a proper contract choice. Fourth, the government should focus on examining private investors’ personal abilities and behavioral preferences and choose private investors with high-capacity endowments and other-regarding preferences. Finally, increasing penalties for opportunistic behavior is not an efficient strategy for the government when a private investor has high cooperation motivation.