Using Bargaining Model with Loss Aversion and a Risk of Breakdown to Determine Compensation for Buyback of Early Terminating BOT Highway Projects

Build-operate-transfer (BOT) tends to be used in the construction industries for massive transportation infrastructure projects, one of which is highway projects. The compensation for the early termination of BOT highway projects has become the most striking and concerning issue for the enterprise and the government. Although the works of the compensation for early terminating BOT projects are rich in the construction industry, there is an absence of a thorough investigation of bargaining game-theoretic applications in the construction engineering and management (CEM). To develop a reasonable and fair decision mechanism for the compensation for early terminating BOT highway projects in CEM, a valid approach to evaluating compensation is proposed using a bargaining game. An alternating-offer bargaining game model is constructed to analyze the bargaining process, where loss aversion of the enterprise and the government as well as risk of breakdown is considered in the bargaining process. The compensation amount is derived by solving the constructed bargaining game model. It is shown that the compensation amount for the enterprise is related positively to loss aversion of the government and negatively to its own loss aversion. It is shown that the enterprise can obtain more compensation from the risk of breakdown. Finally, the results of the developed bargaining game model are verified by applying them to the Wutong Mountain Tunnel BOT highway project in Shenzhen, China. The constructed bargaining model enables the enterprise and the government to forecast the agreement on compensation amount in CEM. This paper offers an approach to compensation for early terminating BOT highway projects in CEM.

Automated summary

BOT model is commonly used in the construction industries, particularly for large transportation infrastructure projects such as highways. The compensation for early termination of BOT highway projects is a significant concern for both enterprises and governments. This study proposes a decision mechanism using a bargaining game to evaluate the compensation amount. By constructing a bargaining game model that considers loss aversion and risk of breakdown, the compensation amount can be determined. The developed model is verified through application to a BOT highway project in Shenzhen, China.