Influence of cooperative period of municipal PPPs on transaction cost – a case study

Purpose

The purpose of the study is to numerically investigate the relationship between the increase in transaction cost and prolongation of cooperative period acting as a nonmonetary incentive for municipal PPP projects.

Design/methodology/approach

A model that combines real option theory and the concept of prospect theory is proposed in the study. Three municipal road PPP projects published by China Public Private Partnerships Center are selected as cases. The data of these cases are analyzed based on the model established.

Findings

The prolongation of the cooperative period affects the increase in transaction cost, which gradually decreases when the prolonged cooperative period increases. Furthermore, the large-investment PPP projects own more transaction cost compared with less-investment projects. The decrease in transaction cost in the former is less than that in the latter. The increase in transaction cost is evidently alleviated in a project with less investment when the cooperative period is prolonged further.

Originality/value

The study systematically analyzes the relationship among transaction cost economics, real option theory and prospect theory and proposes a theoretical flowchart of the effect of nonmonetary incentive on the transaction cost. A model to quantify the effect of nonmonetary incentive (i.e. prolongation of cooperative period) on the transaction cost is proposed for the first time. The results of the study verify that the nonmonetary incentive affects transaction cost.