Research on the Participant Behavior Selections of the Energy Performance Contracting Project Based on the Robustness of the Shared Savings Contract

Guangyuan Xing, Dong Qian and Ju’e Guo
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Guangyuan Xing: School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China
Dong Qian: College of Economics & Management, Northwest A & F University, Yangling 712100, China
Ju’e Guo: School of Management, Xi’an Jiaotong University, Xi’an 710049, China

Sustainability, 2016, vol. 8, issue 8, 1-13

Abstract: The profits of the ESCO (Energy Services Company) and EU (Energy Using Organization) in the EPCP (energy performance contracting project) rely on the signing of the shared savings contract and the successful operation of the project, and the probability of the project’s success is decided by the complementary efforts of the ESCO and EU. However, the effort selection of the two sides face the bidirectional moral hazard caused by asymmetric information. Based on the robustness of shared savings contract, this paper establishes a bidirectional moral hazard model under asymmetric information to analyze the complementary efforts selection of the ESCO and EU with the given revenue sharing rules, and analyzes the differences of the complementary efforts under symmetric and asymmetric information conditions and the impacts of those efforts on the shared savings contract’s robustness by using a numerial simulation. The results show that compared with information symmetry, the bidirectional moral hazard will erode the project’s value under information asymmetry, the project’s success probability and the level of the parties’ efforts will decrease, which reveals the negative impact of asymmetric information on the robustness of the shared savings contract, and the significance of eliminating information asymmetry effectively as well as incentivizing the parties to increase the degree of complementary efforts to enhance the probability of the project’s success. Finally, policy recommendations regarding the introduction of incomplete contracts, promoting guaranteed savings contracts, and improving energy savings audits for the enhancement of the robustness of the shared savings contract are provided. This research will be helpful to improve the theoretical research on the contract’s robustness, perfect the design of the energy service contract, and formulate the related support policies.

Keywords: robustness of the shared savings contract; behavior selection; complementary efforts; bidirectional moral hazard (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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