Collusion prevention mechanism in PPP highway projects: Optimal government subsidy, toll and penalty

Abstract

We study the collusion between the regulator and the private sector in misreporting service quality in highway projects to obtain performance-based subsidies. The impact of collusion on government subsidies and tolls is analyzed using the principal-agent model, and a mechanism to prevent collusion is devised. The analysis explores the incentive effect of government subsidies on effort in the collusion case. A mechanism for preventing collusion was presented to induce the supervision department to report truthful service information, and the effectiveness of the mechanism was analyzed. These results indicate that collusion leads to subsidies that no longer motivate efforts to improve service quality. Specific subsidies and penalties were provided as collusion prevention mechanisms. The collusion prevention mechanism effectively alleviates the ineffectiveness of subsidies, encourages the private sector to increase its efforts, reduces tolls, and improves social welfare. Social welfare is maximized when collusion penalties are imposed entirely on the private sector.