A Dynamic Performance-Based Payment Mechanism for Public-Private Partnership Projects: An Integrated Model for Principal-Agent and Multi-Objective Optimization Models

Abstract

Performance-based payment mechanism is one of the key issues to ensure all stakeholders’ benefits in infrastructure Public-Private Partnership (PPP) projects. However, most existing research on performance-based payment with a fixed incentive coefficient can’t play a good incentive role. This study aims to the intrinsic mechanism between the performance appraisal score and the performance-based payment structure, so as to design the dynamic performance-based payment mechanism for infrastructure PPP projects. Firstly, the multi-objective optimal method is used to calculate the unit-payment. Second, principal-agent theory is used to construct the performance-based payment model with a changeable incentive coefficient. The findings of this study show that, the performance-based payment mechanism can effectively motivate participants to provide high-quality and efficient services, because their remuneration directly depends on their performance. When the outcome does not meet expectations, the amount paid can be adjusted accordingly, thus ensuring the maximum protection of public resources as well as the private sector’s profits. They serve a dual purpose, on one hand, they offer insights to rectify the shortcomings in the current unsatisfactory payment structure. On the other hand, the study provides a theoretical reference for the public sector to effectively incentivize the private sector in enhancing project performance.