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

doi:10.1007/s42524-020-0145-x

Front. Eng

2022, Vol. 9

Issue (2) : 326-336 https://doi.org/10.1007/s42524-020-0145-x

RESEARCH ARTICLE

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

Xiang DING¹, Qian LI²(

)

¹. School of Government, Nanjing University, Nanjing 210023, China
². School of Engineering Management, Nanjing University, Nanjing 210023, China

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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.

Keywords public project contract design risk sharing inequity aversion governance

Corresponding Author(s): Qian LI

Just Accepted Date: 30 September 2020 Online First Date: 19 November 2020 Issue Date: 25 May 2022

Cite this article:

Xiang DING,Qian LI. Optimal risk allocation in alliance infrastructure projects: A social preference perspective[J]. Front. Eng, 2022, 9(2): 326-336.

URL:

https://academic.hep.com.cn/fem/EN/10.1007/s42524-020-0145-x
https://academic.hep.com.cn/fem/EN/Y2022/V9/I2/326

Fig.1 Flowchart of risk allocation model.

Fig.2 Optimal risk-sharing ratio of AL vs. IA level under different scenarios (Notes: “Normal” in the picture stands for the scenario without considering IA. According to Appendix IV, the authors let mФ = 0.5 to simulate the optimal risk-sharing ratio under different scenarios).

Fig.3 AL’s expected utility vs. IA level under different scenarios (Note: “Normal” in the picture stands for the scenario without considering IA).

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