Benefit distribution of guaranteed water saving management contract based on principal-agent theory

Abstract

Aiming at benefit distribution of guaranteed water saving management contract (WSMC) projects, principal-agent theory is used to propose benefit distribution scheme. Firstly, principal-agent models are established in two cases: (1) the water user and WSCO are risk-neutral; (2) the water user is risk-neutral, while WSCO is risk-averse. Then the models are solved by the backward induction method under symmetric information and asymmetric information. The models' results are analyzed and the results show that (1) WSCO's benefit distribution proportion is negatively correlated with effort cost coefficient, risk aversion degree and project uncertainty; (2) the water user's expected utility is positively correlated with project investment scale and WSCO's water saving capacity; (3) WSCO's risk aversion will reduce the water user's expected utility; (4) incentives are only required when WSCO's effort is unobservable. Finally, numerical examples are used to show the above results' rationality and suggestions are given for the water user and WSCO.

Keywords:

• Water saving management contract
• guaranteed water saving model
• principal-agent theory
• benefit distribution

Acknowledgments

The author thanks the editors and reviewers for their careful reading and constructive comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China $\mathrm{\#}$1 [grant number 61873084]; and Graduate Innovative Funding Project of Hebei $\mathrm{\#}$2 [grant number CXZZSS2023122].