Investors’ Escalation Commitment During Transfer Stage In PPP Project

With the upcoming’landing hot’of PPP model in 2016, application of PPP model in future infrastructure field might become a trend. However, because of features such as large funding, long cycle, complex contract, etc., which exist in PPP projects, masses of projects have likelihood of failure or have already failed due to high risks. During the transfer stage, in the case of project failure, rational choice for investors is to quit the project. In practice, however, many of them still tend to continue investment for the failed project, and hope to delay on transferring. This kind of irrational behavior is called escalation of commitment in PPP scheme.Delayed transfer is a way to cope with the failed PPP projects, but researches on this topic are very rare. Relevant studies are usually performed in discusses of decision-making model of concession period, in order to explore the optimal length of the concession period. This thesis introduces the concept of escalation of commitment in PPP project, it expands the study of delayed transfer from a brand new perspective, and explains the irrational behavior of investors when failure occurs in the transfer stage.Combining with features of escalation of commitment, this thesis firstly explained specific situations of investors’escalation of commitment behavior during transfer stage, and built a list of impact factors based on literature review. Then, through studies on ten cases of failed projects, the listed factors were validated, and by comparing theory list and actual cases, the critical impact factors were found out. Inspired by the real options theory, this thesis proposed a threshold model for escalation of commitment to figure out to what extent will investors conduct escalation of commitment behavior. The threshold model for escalation of commitment is based on the framework of self-justification theory and modified cognitive model, it contained two vital parameters-cognitive deviation and intention to escalation of commitment. Tolerance degree of loss and the bottom line of the escalation of commitment behavior were obtained through analyzing the model. Numerical analysis and example analysis were also conducted to interpret the mechanism of threshold model, and illustrated different situation under variant parameters. This thesis tries to provide a theoretical reference for decision-making of investors during transfer stage, as well give some suggestions for the betterment of the PPP model research field.