Optimal risk allocation in alliance infrastructure projects: A social preference perspective
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RESEARCH ARTICLE
Xiang DING, Qian LI
Optimal risk allocation in alliance infrastructure projects: A social preference perspective
© Higher Education Press 2020
Abstract The mechanism of risk allocation is designed to protect all stakeholders, and it is vital to project success. Qualitative and quantitative ways of optimizing risk allocation have been well documented in extant literature (e.g., allocation principles, models, and solutions), and the foci of existing research are usually the maximization of rational utility. Few research has focused on partners’ social preferences affecting the output of risk allocation. This study presents a quantitative approach based on modeling alliance member (AM)’s inequity aversion (IA) to analyze risk-sharing arrangements in an alliance project. Fehr and Schmidt’s inequity-aversion model is integrated into modeling partner’s utility. This paper derives results for an alliance leader (AL)’s optimal risk-sharing ratio and AM’s optimal risk-management effort simultaneously. The derivation is based on solving a restrained optimization problem using the conception and methods from Stackelberg game theory. Results show that an AM’s IA significantly affects risk allocation between AL and AM. Specifically, envious preference is positively related to AL’s optimal risk-sharing ratio, whereas guilty preference negatively affects AL’s optimal risk-sharing ratio. These findings will be of interest to academics and practitioners involved in designing alliance negotiations.
Received May 7, 2020; accepted September 2, 2020 Xiang DING School of Government, Nanjing University, Nanjing 210023, China
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Qian LI ( ) School of Engineering Management, Nanjing University, Nanjing 210023, China E-mail: [email protected] This work was supported by the National Natural Science Foundation of China (Grant Nos. 71921003, 71701090, 71571098, and 72071105), the Social Science Foundation of Jiangsu Province (Grant No. 16JD009), and the Fundamental Research Funds for the Central Universities (Grant No. 14370120).
Keywords public project, contract design, risk sharing, inequity aversion, governance*
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Introduction
Owing to its technological complexity and long duration, infrastructure projects are confronted with a high degree of integration between design, construction, consulting, supplying, and other operation partners (Love et al., 2010). Studies have shown that adversarial/uncooperative relationships between contractors often cause project failures (Ng et al., 2002; Ling et al., 2013). Consequently, selecting an alliance to deliver a complex infrastructure project is preferable (Kumaraswamy et al., 2005; Alderman and Ivory, 2007; Love et al., 2010). An alliance can provide a favorable working environment aiming to motivate partners cooperating and working toward the same goal to achieve project success (Love et al., 2010; Hosseinian and Carmichael, 2013a), and it is proven to be a preferred project delivery method for infrastructure projects (Hauck et al., 2004; Hosseinian and Carmichael, 2013b). Ba
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