Incentive approaches to overcome moral hazard in port concession agreements

• We provided a game theory to overcome the moral hazard for port concession.
• It was discovered that current practices contradict game theory foundation.
• In US, concessions emphasize on the guaranteed minimum throughput over incentives.
• In Europe, lump-sum concession fees are more common than price caps.

This paper provides a game theory foundation for port concession agreements, using the incentive mechanism design. This study identifies the post contractual moral hazard problem, and provides a model involving performance-based concession fees to align successfully the Port Authorities’ interests with those of the terminal operators. To match theory and practice, factual information of recent projects in Europe and the US is reviewed. Evidently, to avoid transaction failures in a Greenfield concession, the port authority needs to identify clearly the objectives undertaken. The port should have the ability to enforce the contract and determine the process of quality assurance.