Collusion and Contract Efficiency in BOT Project

This paper formulates the BOT concession agreement as an incomplete contract model to analyze the inefficient problems arising from the collusion between government inspector and project company. The main advantage of BOT project is that the cost externalities could be internalized in the form of consigning both construction and operation to the project company. However, the moral hazard is caused by the collusion and the limited resource financing. A competitive tender mechanism which endogenously determines the service fee might lead low-quotation, which is not effective to restrain the moral hazard. The paper is concluded by the remark that the contract efficiency is attained when the government keeps the relevant deposit from the project company in advance.