Strategic Interaction between the Government and the Private Sector in PPP Projects Incorporating the Fairness Preference

Abstract

Due to factors including project uncertainties, contract incompleteness, and imperfect supervision systems, relying solely on contracts and supervision cannot effectively reduce opportunistic behavior in public-private partnership (PPP) projects. This study complements the existing literature by investigating the behavioral motivations behind strategic choices, an additional critical factor impacting the effectiveness and implementation of PPP contracts and supervision. Incorporating the fairness preference, this study applies an indirect evolutionary game theoretical approach to model the strategic interaction between the government and the private sector in a PPP project. Through the game theoretical and simulation analysis, possible evolutionary stable strategies (ESS) are predicted between the government and the private sector. The results indicate that the ESS highly depends on the private sector's fairness preference. Private sector entities with weak fairness preferences tend not to behave opportunistically, while those with strong fairness preferences tend to be opportunistic. Moreover, the government adopts a supervision strategy for private sector entities with strong fairness preferences when the supervision cost is lower than the supervision benefit. These findings offer new insights for reducing opportunistic behavior and improving project performance in the context of PPP projects.