Abstract: Recently, although the cooperation between Chinese government and social capital (PPP) has developed rapidly and achieved remarkable results, there still exist various problems of lacking specifications and higher risks. It mainly stems from incomplete contracts; the weakened incentive-restraint mechanism certainly leads to behavior alienation and inefficiency. From the dynamic perspective of the full life cycle, this paper constructs Hart’s HSV extension model and cash flow discount (DCF) model respectively to analyze deeply the efficiency dilemma of PPP projects. This study believes that it is the characteristics of PPP incomplete contracts that lead to the uncertainty of their efficiency, and that the conditions for the maximization of the rights and interests for both sides of the government and the enterprises often deviate. The government should combine the project characteristics and the participants’ behaviors to carry out targeted mechanism design and governance arrangements, improve the contract completeness as far as possible, and establish reasonable risk sharing and incentive compatibility mechanism, so as to form the Pareto improvement. In particular, it should make full use of information and incentive, induce social capital to carry out continuous innovation, and strengthen continuously the project specifications and innovation management, so as to truly form a long-term cooperative partnership.

Key words: incomplete contract; cooperation between the government and social capital; risk sharing mechanism; incentive compatibility mechanism