The effects of service level on BOT transport project contract.

Highlights • Service level is defined as the probability of project capacity satisfying uncertain demand. • We investigate the effects of service level requirement on BOT transport project contract. • We compare service level requirement with capacity regulation and price cap regulation. • We compare the optimal BOT contracts under government regulations with the first-best solution. • Some managerial implications are derived from model results. Abstract For many BOT transport projects, the government imposes service level requirement on the private firm so that project capacity and stochastic demand can be better matched. We define service level as the probability of project capacity satisfying uncertain demand. The results suggest that the presence of service level requirement improves both user fee and project capacity, and also improves consumer surplus while decreases firm profit. We have made two extensions to investigate the government's optimal service level, and to compare service level requirement with capacity regulation and price cap regulation. Some managerial insights offered by model results are discussed. [ABSTRACT FROM AUTHOR]