Ownership Structure and Contract Efficiency in BOT Projects

Based on the game theory, this paper formulates the concession agreement as an incomplete contract model to investigate the effects of different ownership structures on the efficiency of Build-Operate-Transfer (BOT) project. If the ownership is attributed to the private sector, it has stronger incentive to engage in cost reduction investment. However, the moral hazard arises from the incompleteness of contract and limited recourse. For instance, the private sector might engage in the investment of damaging the project performance. On the other hand, the government ownership can control the project performance, but provide little incentive for the private sector to reduce the project costs. This paper is concluded that the efficiency of BOT project is accomplished under the private sector ownership when the deposit system is introduced to restrain the moral hazard.