Optimal choice of capacity, toll and government guarantee for build-operate-transfer roads under asymmetric cost information

• BOT contract considered as a combination of road capacity, toll and government guarantee.
• Investigation of optimal contract under both symmetric and asymmetric information.
• Government guarantee to induce the private investor to reveal true cost information.
• The government suffers a loss of social welfare under asymmetric information.
• The private investor obtains information rent that decreases with his reported marginal cost.

The private provision of public roads via the build-operate-transfer (BOT) mode has been increasingly used around the world. By viewing a BOT contract as a combination of road capacity, toll and government guarantee, this paper investigates optimal concession contract design under both symmetric and asymmetric information about the marginal maintenance cost of private investors. Under asymmetric information, the government guarantee serves as an instrument to induce a private investor to reveal his true cost information. Compared with the situation under symmetric information, the government will suffer a loss of social welfare; the private investor will charge a higher toll that increases in his reported marginal maintenance cost, and specify a lower capacity that decreases with the reported cost. The results also show that the private investor obtains extra information rent beyond the reservation level of return and the rent decreases with his reported cost. However, the resulting volume-capacity ratios of the BOT road under both information structures are the same.