An analysis of information disclosure in build–operate–transfer road projects

Under the Build–Operate–Transfer (BOT) approach, private firms are involved in delivering public road projects. Before launching a BOT road project, the government typically collects demand information by commissioning a demand forecast report, which serves as its private signal. This paper studies how the government should disclose this private information to the firm. We first show that the firm’s optimal road capacity and toll price generate a convex social welfare function with respect to the firm’s belief over demand distribution. As a result, the government either adopts a full-disclosure policy or a partial-disclosure policy, under the former of which the government sends signals that are perfectly correlated with true demand states, while under the latter, the government adopts a mixed strategy in formulating its signals. We show that the government is inclined towards full disclosure if it faces a sufficiently high demand level and towards partial disclosure otherwise. Considering the importance of the lump-sum subsidy in attracting firm participation under demand uncertainty, we have provided conditions under which it is effective in affecting the government’s information disclosure strategies. Furthermore, we have studied the value of information disclosure and found that it is generally first increasing and then decreasing with the firm’s prior belief. Moreover, it is found that government subsidies can improve the value of information disclosure if and only if the subsidy cost is sufficiently small.