How Transaction Costs and Relational Governance Shape Public–Private Partnership Contract Termination in China

Abstract

Governments around the world use public–private partnerships (PPPs) to deliver infrastructure projects, but the complexity of such projects often generates high transaction costs, increasing the risk of contract termination. Relational governance, based on trust and flexibility, is theorized to help manage these costs, though its real-world effectiveness remains contested. Drawing on transaction cost economics and relational governance theory, this study develops a governance misalignment perspective that links project-level transaction hazards and governance mechanisms to PPP termination outcomes. We analyze PPP agreements awarded in China from 2014 to 2020 using event-history analysis. The results indicate that transaction costs exert asymmetric effects: higher asset specificity reduces termination risk through “lock-in” effects, whereas greater performance ambiguity significantly increases the likelihood of failure. Relational governance mechanisms initially mitigate termination risk, but their protective impact weakens as transaction costs rise, revealing the conditional limits of relational governance in complex PPP projects. These findings show that PPP contract termination is better understood as a governance-misalignment outcome than as a generic project failure. More broadly, the study contributes a project-level explanation of PPP termination with implications beyond China, particularly for PPP settings where public authority, political oversight, and contractual adaptation are closely intertwined.