Risk sharing structure of public procurement contracting as mutual holding of financial option

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Under the circumstance of severe budget constraint of national and local governments in Japan, the further efficiency of construction projects has been required. Risk sharing arrangement of contracting is important to give appropriate incentive toward risk management in construction projects to contractors. Construction contract does not permit the breach or termination of contract. In addition, under the joint venture (JV) contracting, more than one contractors undertake a project under the joint and several liability. This study theoretically proves that the efficient risk sharing of JV contracting is characterized by its payoff structure of JV members as financial option.