Using Bargaining Game Theory for Risk Allocation of Public-Private Partnership Projects: Insights from Different Alternating Offer Sequences of Participants

The global expansion of public-private partnerships (PPPs) has generated interest in risk allocation for PPP projects. Many previous researchers have shown that without proper risk allocation, PPP projects cannot be successful. Current research is limited to equilibrium allocation of risk. The objective of this study is to improve this situation by constructing an alternating offer bargaining game model of risk allocation between two players involved in PPP projects, i. e., the public and private sector. Risk allocation can be analyzed as a game to more fully reflect the bargaining process among the parties. Equilibrium risk allocation outcomes were analyzed for the two cases in which the bargaining process was initiated in the first round by the public or private sector, and shows that risk allocation ratio is associated with the sequence of alternating offer, discount factor, and asymmetric degree of information. The probability, severity, and impact of risk factors were considered to prioritize risk allocation. Demonstrating the proposed model using a PPP project case study validated the model as effective and practical. This study contributes to the theoretical foundation for understanding the process of bargaining risk allocation of participants and provides a practical model to aid the participants to achieve fair risk allocation rather than a crude approach with preferences and biases. It promotes participants' rational and cautious behavior. This work also proposes a new risk allocation tool based on bargaining game theory for PPP project researchers to analyze game behaviors in the construction field. (C) 2016 American Society of Civil Engineers.