Skip to main content
SpringerLink
Log in

Optimal risk allocation in alliance infrastructure projects: A social preference perspective

  • Research Article
  • Published:
Frontiers of Engineering Management Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Abednego M P, Ogunlana S O (2006). Good project governance for proper risk allocation in public-private partnerships in Indonesia. International Journal of Project Management, 24(7): 622–634

    Article  Google Scholar 

  • Alderman N, Ivory C (2007). Partnering in major contracts: Paradox and metaphor. International Journal of Project Management, 25(4): 386–393

    Article  Google Scholar 

  • Alireza V, Mohammadreza Y, Zin R M, Yahaya N, Noor N M (2014). An enhanced multi-objective optimization approach for risk allocation in public-private partnership projects: A case study of Malaysia. Canadian Journal of Civil Engineering, 41(2): 164–177

    Article  Google Scholar 

  • Ameyaw E E, Chan A P C (2016). A fuzzy approach for the allocation of risks in public-private partnership water-infrastructure projects in developing countries. Journal of Infrastructure Systems, 22(3): 04016016

    Article  Google Scholar 

  • Ballesteros-Pérez P (2017). Modelling the boundaries of project fast-tracking. Automation in Construction, 84: 231–241

    Article  Google Scholar 

  • Bamberg G, Spremann K (1987). Agency Theory, Information, and Incentives. New York: Springer

    Book  Google Scholar 

  • Bolton G E, Ockenfels A (2000). ERC: A theory of equity, reciprocity, and competition. American Economic Review, 90(1): 166–193

    Article  Google Scholar 

  • Carvalho M M, Rabechini Junior R (2015). Impact of risk management on project performance: The importance of soft skills. International Journal of Production Research, 53(2): 321–340

    Article  Google Scholar 

  • Casey E, Bamford P (2014). Building and Construction Procurement Guide: Principles and Options. Sydney: Australian Procurement and Construction Council, Austroads Ltd.

    Google Scholar 

  • Chan A P C, Osei-Kyei R, Hu Y, Le Y (2018). A fuzzy model for assessing the risk exposure ofprocuring infrastructure mega-projects through public-private partnership: The case of Hong Kong-Zhuhai-Macao bridge. Frontiers of Engineering Management, 5(1): 64–77

    Google Scholar 

  • Chang C Y (2014). Principal-agent model of risk allocation in construction contracts and its critique. Journal of Construction Engineering and Management, 140(1): 04013032

    Article  Google Scholar 

  • Chapman C B, Ward S C (1994). The efficient allocation of risk in contracts. Omega, 22(6): 537–552

    Article  Google Scholar 

  • Chen C, Hubbard M (2012). Power relations and risk allocation in the governance of public-private partnerships: A case study from China. Policy and Society, 31(1): 39–49

    Article  Google Scholar 

  • Chiles T H, McMackin J F (1996). Integrating variable risk preferences, trust, and transaction cost economics. Academy of Management Review, 21(1): 73–99

    Article  Google Scholar 

  • Chou J S, Pramudawardhani D (2015). Cross-country comparisons of key drivers, critical success factors and risk allocation for public-private partnership projects. International Journal of Project Management, 33(5): 1136–1150

    Article  Google Scholar 

  • Chu Y F, You F Q (2014). Integrated scheduling and dynamic optimization by Stackelberg game: Bilevel model formulation and efficient solution algorithm. Industrial & Engineering Chemistry Research, 53(13): 5564–5581

    Article  Google Scholar 

  • Clark A E, Masclet D, Villeval M C (2010). Effort and comparison income: Experimental and survey evidence. Industrial & Labor Relations Review, 63(3): 407–426

    Article  Google Scholar 

  • Clark Brown P (1986). Competitive procurement contracting when risk-preferences are uncertain. Mathematical Modelling, 7(2–3): 285–299

    Article  Google Scholar 

  • Clark Brown P (1987). Optimal risk-sharing when risk preferences are uncertain. Journal of the Operational Research Society, 38(1): 17–29

    Article  MATH  Google Scholar 

  • Croson R, Konow J (2009). Social preferences and moral biases. Journal of Economic Behavior & Organization, 69(3): 201–212

    Article  Google Scholar 

  • Das T K, Kumar R (2011). Interpartner negotiations in alliances: A strategic framework. Management Decision, 49(8): 1235–1256

    Article  Google Scholar 

  • Du G, Jiao R J, Chen M (2014). Joint optimization of product family configuration and scaling design by Stackelberg game. European Journal of Operational Research, 232(2): 330–341

    Article  MathSciNet  MATH  Google Scholar 

  • Fehr E, Schmidt K M (1999). A theory of fairness, competition and cooperation. Quarterly Journal of Economics, 114(3): 817–868

    Article  MATH  Google Scholar 

  • Forsythe R, Horowitz J L, Savin N E, Sefton M (1994). Fairness in simple bargaining experiments. Games and Economic Behavior, 6(3): 347–369

    Article  MATH  Google Scholar 

  • Frank R H, Jennings S, Bernanke B S (2006). Principles of Microeconomics. North Ryde, NSW: McGraw-Hill Education

    Google Scholar 

  • Hartman F, Snelgrove P, Ashrafi R (1997). Effective wording to improve risk allocation in lump sum contracts. Journal of Construction Engineering and Management, 123(4): 379–387

    Article  Google Scholar 

  • Hauck A J, Walker D H T, Hampson K D, Peters R J (2004). Project alliancing at National Museum of Australia-Collaborative process. Journal of Construction Engineering and Management, 130(1): 143–152

    Article  Google Scholar 

  • Ho T H, Zhang J (2008). Designing pricing contracts for boundedly rational customers: Does the framing of the fixed fee matter? Management Science, 54(4): 686–700

    Article  MATH  Google Scholar 

  • Hosseinian S M, Carmichael D G (2013a). Optimal gainshare/painshare in alliance projects. Journal of the Operational Research Society, 64(8): 1269–1278

    Article  Google Scholar 

  • Hosseinian S M, Carmichael D G (2013b). Optimal incentive contract with risk-neutral contractor. Journal of Construction Engineering and Management, 139(8): 899–909

    Article  Google Scholar 

  • Jin H Y, Liu S J, Liu C L, Udawatta N (2019). Optimizing the concession period of PPP projects for fair allocation of financial risk. Engineering, Construction, and Architectural Management, 26(10): 2347–2363

    Article  Google Scholar 

  • Jin X H, Zhang G M (2011). Modelling optimal risk allocation in PPP projects using artificial neural networks. International Journal of Project Management, 29(5): 591–603

    Article  Google Scholar 

  • Kahneman D, Knetsch J, Thaler R H (1986). Fairness as a constraint on profit seeking: Entitlements in the market. American Economic Review, 76(4): 728–741

    Google Scholar 

  • Kakati M, Baruah P (2016). Optimal risk allocation in Public-Private Partnership (PPP) projects in India. In: The 2016 WEI International Academic Conference Proceedings. Boston, 144–166

  • Karim N A A (2011). Risk allocation in Public-Private Partnership (PPP) project: A review on risk factors. International Journal of Sustainable Construction Engineering & Technology, 2(2): 8–16

    Google Scholar 

  • Kate G S, Patil P S (2020). Risk analysis and allocation in public-private partnership power transmission line projects. International Journal of Critical Infrastructures, 16(1): 23–37

    Article  Google Scholar 

  • Katok E, Pavlov V (2013). Fairness in supply chain contracts: A laboratory study. Journal of Operations Management, 31(3): 129–137

    Article  Google Scholar 

  • Khazaeni G, Khanzadi M, Afshar A (2012). Optimum risk allocation model for construction contracts: Fuzzy TOPSIS approach. Canadian Journal of Civil Engineering, 39(7): 789–800

    Article  Google Scholar 

  • Konow J (2001). Fair and square the four sides of distributive justice. Journal of Economic Behavior & Organization, 46(2): 137–164

    Article  Google Scholar 

  • Kumaraswamy M, Ling F Y, Rahman M M, Phng S T (2005). Constructing relationally integrated teams. Journal of Construction Engineering and Management, 131(10): 1076–1086

    Article  Google Scholar 

  • Laffont J J, Marimort D (2001). The Theory of Incentives: The Principal-Agent Model. Princeton, NJ: Princeton University Press

    Google Scholar 

  • Lam K C, Wang D, Lee P T K, Tsang Y T (2007). Modelling risk allocation decision in construction contracts. International Journal of Project Management, 25(5): 485–493

    Article  Google Scholar 

  • Laux C (2001). Limited-liability and incentive contracting with multiple projects. RAND Journal of Economics, 32(3): 514–526

    Article  Google Scholar 

  • Ling F Y Y, Ning Y, Ke Y, Kumaraswamy M M (2013). Modeling relational transaction and relationship quality among team members in public projects in Hong Kong. Automation in Construction, 36: 16–24

    Article  Google Scholar 

  • Lomoro A, Mossa G, Pellegrino R, Ranieri L (2020). Optimizing risk allocation in public-private partnership projects by project finance contracts—The case of put-or-pay contract for stranded Posidonia disposal in the municipality of Bari. Sustainability, 12(3): 806

    Article  Google Scholar 

  • Love P E D, Mistry D, Davis P R (2010). Price competitive alliance projects: Identification of success factors forpublic clients. Journal of Construction Engineering and Management, 136(9): 947–956

    Article  Google Scholar 

  • Love P E D, Sing C P, Wang X, Irani Z, Thwala D W (2014). Overruns in transportation infrastructure projects. Structure and Infrastructure Engineering, 10(2): 141–159

    Article  Google Scholar 

  • Luttmer E F P (2005). Neighbors as negatives: Relative earnings and well-being. The Quarterly Journal of Economics, 120(3): 963–1002

    Google Scholar 

  • McAfee R P, McMillan J (1986). Bidding for contracts: A principal-agent analysis. RAND Journal of Economics, 17(3): 326–338

    Article  MathSciNet  Google Scholar 

  • Meng Q, Li Z, Du J, Liu H, Ding X (2019). Negotiation for time optimization in construction projects with competitive and social welfare preferences. Complexity, 3269025

    Google Scholar 

  • Nasirzadeh F, Khanzadi M, Rezaie M (2014). Dynamic modeling of the quantitative risk allocation in construction projects. International Journal of Project Management, 32(3): 442–451

    Article  Google Scholar 

  • Ng S T, Rose T M, Mak M, Chen S E (2002). Problematic issues associated with project partnering—The contractor perspective. International Journal of Project Management, 20(6): 437–449

    Article  Google Scholar 

  • Nicholas A (2012). Fairness as a constraint on reciprocity: Playing simultaneously as dictator and trustee. Journal of Socio-Economics, 41(2): 211–221

    Article  Google Scholar 

  • Osei-Kyei R, Chan A P C (2015). Review of studies on the critical success factors for Public-Private Partnership (PPP) projects from 1990 to 2013. International Journal of Project Management, 33(6): 1335–1346

    Article  Google Scholar 

  • Owen S, Yawson A (2013). Information asymmetry and international strategic alliances. Journal of Banking & Finance, 37(10): 3890–3903

    Article  Google Scholar 

  • Pishdad-Bozorgi P, de la Garza J M, Austin R B (2016). Readiness assessment for flash tracking. Journal of Construction Engineering and Management, 142(12): 06016005

    Article  Google Scholar 

  • Rasul N, Malik M S A, Bakhtawar B, Thaheem M J (2019). Risk assessment of fast-track projects: A systems-based approach. International Journal of Construction Management, in press, doi: https://doi.org/10.1080/15623599.2019.1602587

  • Rey-Biel P (2008). Inequity aversion and team incentives. Scandinavian Journal of Economics, 110(2): 297–320

    Article  Google Scholar 

  • Rohde KIM (2010). A preference foundation for Fehr and Schmidt’s model of inequity aversion. Social Choice and Welfare, 34(4): 537–547

    Article  MathSciNet  MATH  Google Scholar 

  • Scherer F M (1964). The theory of contractual incentives for cost reduction. The Quarterly Journal of Economics, 78(2): 257–280

    Article  Google Scholar 

  • Shan M, Le Y, Yiu K T W, Chan A P C, Hu Y, Zhou Y (2018). Assessing collusion risks in managing construction projects using artificial neural network. Technological and Economic Development of Economy, 24(5): 2003–2025

    Article  Google Scholar 

  • Tang Y, Chen Y, Hua Y, Fu Y (2020). Impacts of risk allocation on conflict negotiation costs in construction projects: Does managerial control matter? International Journal of Project Management, 38(3): 188–199

    Article  Google Scholar 

  • Tseng F S, Yeh Y (2014). Maintenance outsourcing coordination with risk-averse contractors. Journal of the Operational Research Society, 65(11): 1760–1769

    Article  Google Scholar 

  • Winch G M (2010). Managing Construction Projects. Chichester: Wiley-Blackwell

    Google Scholar 

  • Xu H L, Wang X Y (2014). Optimization and Control Methods in Industrial Engineering and Construction. Dordrecht: Springer

    Book  Google Scholar 

  • Xue W L, Caliskan Demirag O, Niu B Z (2014). Supply chain performance and consumer surplus under alternative structures of channel dominance. European Journal of Operational Research, 239(1): 130–145

    Article  MathSciNet  MATH  Google Scholar 

  • Yescombe E R (2002). Principles of Project Finance. San Diego, CA: Academic Press

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Government, Nanjing University, Nanjing, 210023, China

    Xiang Ding

  2. School of Engineering Management, Nanjing University, Nanjing, 210023, China

    Qian Li

Authors
  1. Xiang Ding
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Qian Li
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Qian Li.

Additional information

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).

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ding, X., Li, Q. Optimal risk allocation in alliance infrastructure projects: A social preference perspective. Front. Eng. Manag. 9, 326–336 (2022). https://doi.org/10.1007/s42524-020-0145-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s42524-020-0145-x

Keywords

Search

Navigation