A bargaining mechanism with incomplete information and its application in trilateral BOT negotiations

Successful implementation of Build/Operate/Transfer (BOT) type infrastructure projects requires major BOT stakeholders, namely the Sponsor, the Government, and the Lender to reach an agreement on the terms of the concession and loan contracts and comply with the agreed-upon terms. The natural unwillingness of the parties to disclose their private information such as their utility functions could slow down and even break down a BOT negotiation process as well as any negotiation process. Even if incomplete information does not prevent parties from reaching an agreement, lack of fairness could result in costly renegotiations in the future. The general view in current game theory literature is that the players are able to discuss the situations with perfect information in a cooperative bargaining process. This assumption requires each player to make known his utility function and disagreement outcome at the negotiation table. Then, all players should select a unique utility pair in the utility space which satisfies the axioms of the pre-agreed bargaining model, such as the Nash or Kalai-Smorodinsky bargaining solutions. This thesis proposes a novel prescriptive bargaining mechanism with incomplete information which allows players to reach a considerably 'fair' and 'efficient' agreement with limited information sharing. Additionally, a new trilateral BOT negotiation framework over multiple decision variables has been developed. In the framework, three major parties, namely, the Sponsor, the Government, and the Lender are supposed to negotiate and reach an agreement over the two most important decision variables in a BOT deal: the length of the concession period granted to the Sponsor by the Government, and the capital structure, which refers to the combination of equity and debt in BOT asset. The novel bargaining mechanism when applied to trilateral BOT negotiations could help the industry practitioners facilitate the BOT negotiation process and avoid costly renegotiation by addressing fairness in the first place. Though the bargaining mechanism with incomplete information has been developed particularly for trilateral BOT negotiation process, its application area is far-reaching and broader. It can facilitate stuck negotiations, due to reluctance of private information sharing, ranging from negotiations as simple as pie splitting, to inter-firm and international negotiations.