Energy Policy 77 (2015) 216–226

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Setting up charging electric stations within residential communities

in current China: Gaming of government agencies and property
management companies
Tian Wu a, Lin Ma a, Zhonggen Mao b, Xunmin Ou c,d,n
a
School of Economics and Management, Tsinghua University, Beijing 100084, China
b
School of Business Administration, Southwestern University of Finance and Economics, Chengdu 611130, China
c
Institute of Energy, Environment and Economy, Tsinghua University, Beijing 100084, China
d
China Automotive Energy Research Center, Tsinghua University, Beijing 100084, China

H I G H L I G H T S

The charging of electric vehicles (EVs) is hindering their use.

A game theory model is used for analysis of EV charging station construction.

Charging stations are in residential communities in China.

Government agencies are constantly improving incentive mechanisms.

art ic l e i nf o a b s t r a c t

Article history: The difficulty of charging electric vehicles (EVs) is now hindering their further development. Govern-
Received 6 August 2014 ments generally choose to build stations for home charging (including piles) within residential
Received in revised form communities. Given the conflict of interest between various government agencies and property
12 October 2014
management companies, constructing a charging station within residential communities would result
Accepted 13 October 2014
Available online 1 December 2014
in welfare loss for the property management companies and therefore lead to the principal–agent
problem. This paper constructs a two-period imperfect information game theory model to study the
Keywords: moral hazard involved in this issue and government agencies' optimal choice. In the analytic solution of
Electric vehicle the model, we find that the optimal choice for a farsighted government agency is to constantly improve
Electric charging station
the incentive mechanism and introduce charging stations only when the conflict of interest is
Game theory model
eliminated. Any benefits derived from government regulations by force would prove short-lived. The
government should focus on long-term returns in the development of EVs, and its optimal mechanism
should be designed to mitigate the principal–agent problem of property management companies,
thereby accelerate the progress of EV charging infrastructure and improve overall social welfare.
& 2014 Elsevier Ltd. All rights reserved.

1. Introduction Zhou et al., 2013) and reduces use of scarce fossil fuel resources like
petroleum (e.g., Ou et al., 2010), which in turn reduces greenhouse
In the course of the development of electric vehicles1 (EVs), gas emissions and exposure to tailpipe emissions from personal
countries have had differing opinions. On the one hand, it is transportation (Hawkins et al., 2013) like those of comparable
necessary to realize that the promotion of EVs helps energy conventional Internal Combustion Engine Vehicles (ICEVs). This
conservation and environmental protection (e.g., Tseng et al., 2013; is of great significance for the sustainable development of energy
(e.g., Natural Resources Defense Council, 2007; Egbue and Long,
2012). On the other hand, obstacles such as energy storage
n
Corresponding author at: Institute of Energy, Environment and Economy, (Anderman, 2007; Mandel, 2007) and consumer attitudes (Egbue
Tsinghua University, Beijing 100084, China. and Long, 2012) are inevitable. The most salient among these
Tel.: þ 86 10 62797376; fax: þ 86 10 6279 6166. obstacles is the predicament of vehicle batteries.
E-mail address: ouxm@mail.tsinghua.edu.cn (X. Ou).
1
In this paper, the definition of electric vehicle applies, i.e., the term EV refers
The first three obstacles that hinder the EV market entry: Firstly,
to a vehicle that can draw part or all its power from the electric grid (Ma et al., the prohibitive cost of such batteries gives EVs no advantage over
2012). conventional ICEVs with respect to the manufacturer's suggested

http://dx.doi.org/10.1016/j.enpol.2014.10.012
0301-4215/& 2014 Elsevier Ltd. All rights reserved.
 T. Wu et al. / Energy Policy 77 (2015) 216–226 217

retail price (e.g., Delucchi and Lipman, 2001; Hidrue et al., 2011; Among the many problems mentioned above, we focus here on
Kihm and Trommer, 2014). Secondly, vehicle lifecycle costs are the difficulty of EV charging. The most crucial factor in solving this
sensitive to battery replacement (Wood et al., 2011) and the limited problem lies in the construction of infrastructure such as charging
charge cycle and short lifespan of vehicle batteries leads to high stations (Liu, 2012; Peterson and Michalek, 2013). The current
replacement cost (Pollet et al., 2012; Lin et al. 2013). Thirdly, a large scarcity of public charging infrastructure is one of the major barriers
number of studies have well documented that driving range is to mass household adoption of EVs (Sweda and Klabjan, 2011).
limited because of the short duration of batteries (e.g., Hidrue et al., According to the results of a community survey, CPW 2010,
2011; Ralston and Nigro, 2011; Benysek and Jarnut, 2012; Egbue and respondents were asked to describe their ideal charging scenarios
Long, 2012; Peterson and Michalek, 2013). if they were to purchase an EV. The majority of respondents
Fourthly, it is difficult for a user to charge an EV. Infrastructure indicated a preference to charge at home most of the time (Parker
construction of electric charging stations is in an early phase. et al., 2012). Most studies of changing infrastructure have focused
Charging sites on city streets cannot meet the demand of EV on the technology through charger power levels (e.g., Botsford and
refueling, and they are not as convenient as gas stations (Becker Szczepanek, 2009; Yilmaz and Krein, 2013) and the charging
et al., 2009; Zhang et al., 2014). Furthermore, a lengthy charging station location problems (e.g., Xi et al., 2013; Tang et al., 2013;
time increases user time requirements, therefore EVs cannot refuel Chen and Hua, 2014). Given that erecting charging stations and
as quickly as the conventional ICEVs. Bashash et al. (2011) investi- charging piles in residential areas would incur objections from
gated the problem of optimizing plugin hybrid EV (PHEV) charge property management companies (or community service compa-
patterns for simultaneous reduction of energy cost and battery life nies)2 in China, we indicate another obstacle for the construction
degradation, showing that these two objectives conflict. Generally, of changing infrastructure, not yet given in previous studies. This is
the charging pattern for EVs can be divided into rapid and slow a conflict of interest between government agencies and property
according to the time of charging. Slow charging is typically over- management companies. Therefore, we studied the problem of
night. This is a definition easy to grasp that translates into a 6–8 h barriers to construction of charging stations within residential
period (Botsford and Szczepanek, 2009). CAERC (2013) summarized areas for home charging, using a two-period imperfect informa-
the tradeoff between these two modes in the following manner. tion game model. This investigation involved the moral hazard
A characteristic of slow charging is that charging current and power problem of property management companies and optimal policy
are relatively low, having a lower impact on battery lifespan and the and mechanism design of government agencies.
power grid. Such slow charging corresponds to load time troughs Compared with developed countries, construction of China's
on the grid, which decreases charging cost. However, the main electric charging stations experienced a late start; in particular it is
drawback of slow charging lays in its long duration. It also requires associated with The 12th Five-Year Plan of Intelligentization Program
a parking space, which makes it difficult to meet the requirements of State Grid Corporation of China released in September 2010 (State
of emergency vehicle charging. In contrast, rapid charging has a Grid Corporation of China, 2010). Fig. 1 3 presents the charging
unique advantage in a charging network, which is shortening stations situation in three representative countries and shows that
charging time from 20 min to 2 h for full charge. However, there infrastructure construction of electric charging stations is limited
are disadvantages: (1) Rapid charging has a significant impact on in China and lags far behind the U.S. and Japan.
battery lifetime; (2) given the low level of standardization of vehicle There are two features in the construction of China's electric
batteries, the rapid charging device has poor versatility for match- charging stations. One is that the state keeps laying out construc-
ing various batteries; (3) the cost of the rapid charging device is tion plan of charging stations and charging piles. The other is that
significantly higher compared with the slow charging device; (4) actual implementation of these plans proceeds slowly and fails to
the rapid charging device's maintenance and operation require meet the timetable, as demonstrated in Table 1.
specialized technical personnel; (5) in case many fast chargers are Furthermore, there is an unbalanced development of construc-
operated simultaneously at full output, the total load seriously tion of electric charging stations in different provinces (see Fig. 2).
challenges stability and bearing capacity of the grid. Recently, As shown in Fig. 2, there are two dimensions of the aforemen-
several studies have tried to provide solutions in the short term. tioned unbalanced development:
Ye et al. (2013) used the practical data from demo stations in several
cities to analyze the factors to promote the whole vehicle leasing 1) At the province level, most electric charging stations are
model from both the points of view of consumers and leasing constructed in the eastern coastal regions, with Guangdong
companies. Besides, Cai et al. (2013) had compared the organization Province leading the table. Other provinces including Zhejiang,
pattern and profit ability of EV taxi business between battery- Beijing, Shandong, Jiangsu, Hubei and Shanghai had more than
charging service in Shenzhen and battery-swapping service in 20 sites in 2014. In contrast, there were four provinces without
Hangzhou to promote the EV industrialization in China. any stations, all situated in western regions of the country,
Finally, there are many security and stability issues of vehicle i.e. Inner Mongolia, Xinjiang, Tibet and Guizhou provinces.
batteries. Toward enlarging the market share of EVs and hybrid 2) At the city level, we collected data from hundreds of volumes of
EVs (HEVs), safety and reliability are the top user concerns. local yearbooks of China, and identified the year in which the
However, both are subject not only to battery technology but also prefecture constructed the first EV charging station (see different
the battery management system (Xing et al., 2011). Lu et al. (2013) color of circles in Fig. 2). Starting in 2008, the Chinese govern-
showed that lithium-ion batteries for vehicles have high capacity ment launched a substantial demonstration program called “Ten
and large serial–parallel numbers, which coupled with problems
such as safety, durability, uniformity, and cost, impose limitations 2
In this paper, we do not distinguish property management and community
on wide application of those batteries in vehicles. With a similar
service companies, and use a general designation as property management
point of view, Pollet et al. (2012) stated that current nickel and companies.
cobalt-based oxide Li-ion cathode materials have potential issues 3
This includes fast and slow charging sites in China and the USA, whereas
with overcharging. Moreover, voltage control at cell, module, and statistics cover only CHAdeMO fast charging stations in Japan.
battery level is critical to prevent overcharging of automotive Li- ∙ China data: Several sources, including series yearbooks of China, government
and newspaper reports.
ion batteries, but these are all factors that inevitably increase ∙ US data: Transportation Energy Data Book: Editions 32, 31, 30, 29 and 28.
battery cost. Lithium iron phosphate cathodes offer a promising ∙ Japan data: Official website of CHAdeMO published annual data about the
future but with lower specific energy and power density. number of CHAdeMO fast charging stations.
218 T. Wu et al. / Energy Policy 77 (2015) 216–226

18,000 problems arise in charging stations within residential areas,

China 15,989
16,000 causing substantial loss to residents living in the vicinity. Security
Japan issues exist not only at charging stations but any station with
Number of Charging Station

14,000
United States combustible energy, such as those with gas and natural gas. It was
12,000
reported that in January 2014, a natural gas station in the Baiyun
10,000 District of Guangzhou was opposed by 3000 residents due to
8,000 7,197 security reasons.4 There are many similar cases. For example, Hao
6,000 Huang, minister of Shanghai Fire Research Institute of MPS, has
pointed out that the existing fire codes and power equipment of
4,000
1605 1861 fire prevention regulations for the construction of electric vehicle
2,000 833 687
6 95
466 76
532 506 243 443 518 charging infrastructure are lack of guidance. To solve the problem,
0
2009 2010 2011 2012 2013
Society of Automotive Engineers of China, China Fire Protection
Year Association and Fire Department of Ministry of Public Security
have jointly launched the Project on Electric Vehicle Fire Protection
Fig. 1. Number of EV charging stations in China, USA, and Japan (2009–2013).
System with Technical Specification.5 Kaiming Ni, President and CEO
of Volkswagen China, once remarked that it is unsafe to construct
Table 1 EV charging infrastructure in parking lots.6 A charging station was
Construction of China's EV charging stations: state grid as example. boycotted by students and parents of Meiyuan Primary School in
Shenzhen.7 Aside from hidden dangers, the construction of char-
Source Number of charging station Number of charging
and battery-exchange station pile/thousands ging piles in China is also complicated and different from the
situation in U.S.: Most American EV users live in single-family
First plan: state grid plan, September 2010 houses with a garage, where it is relatively easy to install charging
12th Five-Year 904 233
piles without much dispute. However, residents in first-tier cities
Second plan: world forum of smart grid, September 2011a
12th Five-Year 2900 540
in China mostly reside in buildings without a garage, thus charging
Third plan: state grid report, June 2013b stations and piles can only be installed in parking lots. Moreover,
12th Five-Year 3700 340 many older blocks have no fixed parking lot, so they are not fit for
Actual completion: state grid social responsibility report 2013c reconstruction. In new residential districts, erecting charging piles
End of 2013 400 19
would affect the community layout, power supply, electricity
a
http://www.cec.org.cn/yaowenkuaidi/2011-09-28/69717.html. consumption, and circuits. Even in new residential districts that
b
http://www.china-cpp.com.cn/article-252-44671.html. are fit for reconstruction, the parking places are limited, so
c
http://ebook.indaa.com.cn/product/producttryreadflash.html? adjustment of fixed parking spaces is necessary. All aforemen-
pid=19417&bid=6469.
tioned factors are reasons for the objection of property manage-
ment companies to charging piles within residential areas. An
Cities & Thousand Units” to promote such new vehicle technol- additional complication is that because of profit maximization,
ogies (also called “energy-saving and new-energy vehicles” individual automobile corporations produce charging piles that
in the country). The number of demonstration cities has match only its own brand of EVs. This makes a uniform interface
expanded to 25 (Wu et al., 2012). We marked these cities with for charging difficult. Thus, erecting charging stations and charging
blue flags in the figure. Most of the participating cities con- piles in blocks involves the interest of various parties. Government
structed the first electric charging stations before 2011, but the agencies must negotiate with residents, property management
city of Hohhot only had an electric charging station in 2014. companies, owners' committees and others.
Although charging stations and charging piles within residential
Now, EV development in China has entered a new phase, and districts have been resisted by property management companies,8
China has launched the Electric Vehicle Subsidy Scheme (EVSS) in various provinces and cities have been working to promote the
Jan 2009 to promote the market penetration of EV (Hao et al., development of EVs. For instance, Beijing recently enacted policies
2014). However, the debate over charging stations in residential promoting charging stations in residential areas. On May 15, 2014,
areas has grown more intense associated with EV development. the Beijing Municipal Commission of Development and Reform,
Erecting charging piles in parking lots is the most important Beijing Municipal Science & Technology Commission, and Beijing
action. There is still tradeoff regarding charging stations within Municipal Commission of Economy and Information Technology
residential areas. On the one hand, they largely solve the problem issued Administrative Rules of the Construction of Charging Facility for
of charging. Since EVs cannot quickly refuel in the same way as New Energy Vehicles in Beijing9 (hereafter referred to as the charging
conventional ICEVs and vehicle batteries can only facilitate a short administrative rule). Further, targeting the difficulty of charging
driving range, an EV basically requires a full charge daily. To piles within community districts, the Beijing Municipal Commission
preserve the lifespan of vehicle batteries and reduce their replace- of Housing and Urban–Rural Development and Beijing Municipal
ment cost, slow charging provides a better choice. Thus, if charging Commission of Development and Reform issued Notification of
piles are erected in parking lots of residential areas, EV users can Promoting the Construction of Charging Facility in residential areas
complete slow charging at home overnight. In this way, the for New Energy Vehicles10 (hereafter referred to as the charging
demand for usage the following day is met and the lifespan of facility notification) on July 1, 2014. Correspondingly, the ratio of
vehicle batteries is prolonged. Axsen and Kurani (2010) forwarded charging piles to EVs should not be less than 1:1 (Zhang et al., 2014).
home recharging as the key criterion characterizing a plausible
early PHEV market. Regarding non-home recharge potential, they
found that only 4.4% of respondents found outlets at work, and 4
http://news.xinhuanet.com/mrdx/2014-01/22/c_133064206.htm.
5
9.1% found outlets at all other non-home locations (e.g., friend's http://china.caixin.com/2013-11-07/100602002.html.
6
home, school or commercial site). http://auto.ifeng.com/news/interview/20110718/644773.shtml.
7
http://gd.sohu.com/20101202/n278057403.shtml.
On the other hand, erecting charging piles in residential areas 8
http://www.d1ev.com/comment/opinion/2014070932826.html.
would incur objection from property management companies. 9
http://zhengwu.beijing.gov.cn/gzdt/gggs/t1356876.htm.
Vehicle batteries have security problems, electric and fire security 10
http://zhengwu.beijing.gov.cn/gzdt/gggs/t1361489.htm.
 T. Wu et al. / Energy Policy 77 (2015) 216–226 219

Fig. 2. Number of EV charging stations in provinces of China.

In other words, a mass charging station is replaced by scattered and presents several implications for the development of EV
charging piles. This ensures both convenience and security of charging infrastructure.
charging. These policies could persuade property management
companies to cooperate in the construction of charging piles, but
the principal–agent relationship between government agencies and 2. Methods
those companies renders the conflict of interest, with the former
causing profit loss for the latter, and the latter facing severe moral It is common knowledge that government plays the role of
hazard problems. Therefore, if the government agencies do not social planning and one of their major goals is maximizing social
realize the game brought by the principal–agent relationship and welfare. Therefore, before giving projects the green light, govern-
thereby fails to establish incentive mechanisms, the predicament of ment agencies must thoroughly contemplate the implementation
EV charging will remain unsolved. Currently, rules enacted by the of electric charging station construction and later stage of usage.
government agencies restrict the obligation of property manage- Government agencies strongly endorse EV development because
ment companies in the construction stage but not in the use stage. of several of their environmental protection and energy-saving
Furthermore, maintenance of the charging facility is the responsi- properties. To begin, driving EVs on a much broader scale can
bility of the owner, which means no responsibility for property alleviate China's air pollution problem, reduce greenhouse gas
management companies. Therefore, for the pursuit of profit, the (GHG) emissions, levels of haze and PM2.5 (fine particulate matter
agent would still affect negatively later usage of charging piles, for up to 2.5 mm in size), and dependency of the Chinese automobile
example, by charging additional fees for maintenance. industry on fossil energy sources. Furthermore, EV development can
The research presented herein was conducted with against such have a positive impact on sustainable long-term use of natural
a backdrop. The aims were to establish a two-period imperfect resources by the domestic automotive industry, alleviate pressure on
information game model between government agencies and prop- the country's precious oil reserves, spur development of national
erty management companies, to state as the principal–agent industry, and support the growth of related industries, thereby
problem of charging piles within residential districts, and to provide increasing the domestic demand. In summary, promoting EVs would
theoretical evidence and support for government agencies in have a positive effect on China's long-term and healthy economic
formulating pertinent policies. development. However, there are differences in the perceptions of
The remainder of the paper is organized as follows. Section 2 government agencies and property management companies for
presents the two-period imperfect information game model understanding the benefits. The companies may not be fully aware
between government agencies and property management compa- of all positive externalities brought by EVs, because they are solely
nies. Section 3 presents an analytic solution and shows the optimal concerned with their own benefits.
policy and mechanism design of government agencies. Section 4 The question of constructing electric charging stations within
discusses the results of the sensitivity analysis. Section 5 concludes residential areas has been addressed. Although a decision could be
220 T. Wu et al. / Energy Policy 77 (2015) 216–226

regarded as a relatively good solution for the promotion of EV use, government agencies care more about the process of construction
certain disadvantages for the property management companies are of charging piles in the residential areas, and a smaller value means
recognized. For example, the relatively low safety levels of EV those agencies would be willing to provide incentive schemes to
batteries could lead to electricity and fire control safety issues. reduce management's moral hazard. Subscript t signifies the period.
Construction of electric charging piles within residential areas can The work builds a two-period imperfect information game with
have an enormous effect on residential area planning, demand and t ¼ 1; 2. There is a tradeoff in government agency decisions. On the
supply of electricity, and layout of electric wiring. Last, there is an one hand, those agencies want to construct charging facilities
issue of legal responsibility for any accident. All the aforementioned closer to residents to make charging easier and thereby increase
reasons can reduce the utility and welfare of property management total ownership and market share of EVs. On the other hand,
companies and inevitably make them be less inclined to support constructing charging piles well within the residential areas cause
the idea and resist electric charging sites in residential areas. property management company welfare loss. Without proper
Accidents such as the 2013 Tesla Motors fire11 may aggravate incentive mechanisms and owing to the moral hazard problem,
disagreement with government agencies, and citizens might begin the property management companies pursuing their own welfare
doubting government policy and societal stability and harmony maximization will oppose construction of the stations within the
could be put at risk. residential areas for home charging, and will take actions harmful
According to charging administrative rule and charging facility to the promotion of EVs and overall social welfare.
notification regulations, it is clear that as far as the construction of Note that we are able to normalize the price to 1, because there
electric charging stations in residential areas is concerned, govern- is only one type of good in the production market for this model.
ment agencies act as the principal and property management This assumption is reasonable and does not affect the conclusions,
companies as the agent. The government agencies have published because EVs and conventional ICEVs are perfect substitutes in the
regulations to constrain the behavior of property management automotive market.
companies by implementing enforcement measures and ensuring Since we focus on the conflict of interest between the govern-
successful installation of charging piles in parking lots. However, as ment agencies and property management companies, simplifying
mentioned in Section 1, the two regulations published by the the relationship between F ðI Þ and EðI Þ enables a focus on the welfare
Beijing Municipal Commission of Development and Reform merely loss from the moral hazard problem. Without loss of generality, we
confirmed the duties of property management companies but did take the specific function of externality as EðI Þ ¼ αF ðI Þ, α 40. This
not provide either an answer to the difficulties and dangers assumption implies that the economic benefits of EVs and extern-
associated with the construction and use of electric charging sites ality on the environment are moving in the same direction, which
or a clarification as to whether the government agencies would means that for every unit of EV output there will be an incremental
provide subsidies or other incentive schemes. This shortcoming is α unit of positive externality.
important, because construction of the electric charging stations in Furthermore, assuming Lt follows a quadratic form such that
Lt ¼ ð1=2Þξt , with ξt an exogenous variable. Such a quadratic form
2
residential areas brings no additional profit to the property man-
agement companies and the government agency enforcement implies that the welfare loss of the agents is nonlinear. Setting the
measures reduce the level of welfare and aggravate the moral coefficient to 1/2 is a common practice in theoretical models, which
hazard problem of those companies. simplifies the first-order condition (He et al., 2009; Du and Liu, 2013).
Maximization of the social welfare can be expressed as Therefore, the social welfare W generated from construction of

 charging piles can now be rewritten as
max W t ¼ θG ½F ðI t Þ þ EðI t Þ  Lt C t ; ð1Þ
n o
max W t ¼ θG ð1 þ αÞF ðI t Þ  ð1=2Þξt  C t :
2
ð2Þ
where W denotes the social welfare from constructing charging
facilities. I is factor input, the investment for constructing charging
piles within residential areas, reflecting the ease of refueling EVs. If the government agencies focus more on long-term develop-
F ð U Þ is the production function and F ðI Þ is the number of EVs, which ment of EVs and want the property management companies to
satisfies the condition F ðI Þ 4 0, F'ðI Þ 4 0. The intuition of this respond to their welfare-maximizing policies, then the agencies
assumption is that a larger I indicates much easier EV charging. should not forcibly restrict the obligation of property management
Everything else being equal, consumers are more disposed to buy companies in the erection stage through regulations. Rather, the
EVs, increasing total ownership.EðI Þ denotes the positive externality government agencies will listen to the companies voices, design
on energy conservation and environment protection associated the incentive mechanism accordingly and thereby mitigate the
with EV promotion, which satisfies condition EðI Þ 4 0, E'ðI Þ 4 0. L moral hazard. We define this type of government agency as far-
denotes welfare loss from the property management companies' sighted, i.e., it focuses on long-term returns. Otherwise, if during
moral hazard problem, and the degree of moral hazard and effort policy design that agency focuses solely on installing charging
level will vary as those companies respond to government policies. piles, ignores the interests of property management companies
Regarding lack of proper incentives, the closer the charging sites are and does not listen to their voices, owing to the moral hazard of
to the residential areas, the greater the welfare loss of property the agent, a series of problems will appear during the usage stage,
management and the graver the principal–agent problem.C is the even if the installation goes smoothly under legal protection. We
fixed cost of constructing charging piles and is a constant. θG is the call this type of government agency short-sighted, i.e., it focuses
set of types12 for government agencies in the imperfect information solely on short-term returns. In fact, as long as there is the conflict
game, reflecting the weight of economic benefits relative to of interest between government agencies and property manage-
property management companies' moral hazard. θG is time- ment companies, there will be a moral hazard problem from those
invariant and θG Z 1. A larger value of θG means that the companies. Regulations in the installation stage can only help with
short-term infrastructure construction, and will not induce the
property management companies to respond to the government
11
http://insideevs.com/third-tesla-model-s-fire-in-past-5-weeks-breaks-out- agencies' optimal policies in the long-term. According to charging
after-accident/. facility notification, the regulations apply only to the installation
12
In an imperfect information game, a means for representing player uncer-
tainties about payoffs is often expressed as “types,” and players may know their
stage and do not cover the later stage of charging pile use.
own type with certainty. In our model, only government agencies have knowledge Furthermore, that notification states that the maintenance of
of their own type θ G . charging facility is the responsibility of the owner, so there is no
 T. Wu et al. / Energy Policy 77 (2015) 216–226 221

responsibility for property management companies. As a result, between the government agencies and property manage-
those companies have an incentive to thwart the use of charging ment companies, social welfare is optimized and there is no
piles by, for example, limiting power use, hindering maintenance, moral hazard problem. A far-sighted government agency
and charging additional fees for maintenance. considers the principal–agent problem when designing poli-
We model the game as follows. The game between the govern- cies and incentive schemes, and attempts to minimize those
ment agencies and property management companies is an imper- factors of uncertainty. Accordingly, as the property manage-
fect information one and lasts two periods. The government agency ment companies realize that it suits their interest, they take
type (far- or short-sighted) is private information and unknown desirable actions that are also in the interest of the principal.
to the companies. Those companies can only have an expectation 2) A short-sighted government agency neglects the interest of
regarding the agency's type distribution, and maximize their own the property management companies and focuses exclusively
expected payoffs to obtain a decision rule. However, the companies on constructing new charging piles in the current period.
can update their beliefs regarding the government agency type by Such an agency does not offer any incentive scheme. Rather,
observing the action of that agency in the first period by Bayes' rule. it carries out its decisions by force, for example, via enforce-
The prior probability of the government agency type is ment measures.
(
θG ¼ 1 with probability q1
: ð3Þ If the government agency builds the charging piles within
θG 4 1 with probability 1 q1
residential areas through enforcement measures in period 1, the
If the agency is a short-sighted type, the decision rule of that property management company can infer that the agency is of the
agency is solely a function of its own benefit, neglecting the interests short-sighted type.
of the property management companies. Therefore, the govern- Following Bayes' rule, we have
 
ment agencies may forcibly restrict the obligation of those companies  p ξ1 4 0jθG ¼ 1 p θG ¼ 1
q2 ¼ p θG ¼ 1jξ1 4 0 ¼    
during the erection stage via regulations, pursuing the benefits p ξ1 4 0jθG ¼ 1 p θG ¼ 1 þ p ξ1 40jθG 4 1 p θG 41
of ð1 þ αÞF ðI 1 Þ in the first period. Responding to the government 
p θG ¼ 1
agency's short-sighted action, the property management companies ¼    
p θG ¼ 1 þðp ξ1 40jθG 4 1 =p ξ1 40jθG ¼ 1 Þp θG 41
have a strong incentive to grab benefits as a result of the long-term
q1
agency problem. By contrast, if the government agency is a far- ¼    ¼0 ð6Þ
q1 þ 1 q1 ðp ξ1 40jθG 4 1 =p ξ1 40jθG ¼ 1 Þ
sighted type, it will sacrifice welfare ð1 þ αÞF ðI 1 Þ in the first period

and offer proper incentives to reduce the moral hazard of the agent. where p θG ¼ 1 is the probability
 that the government agency is of
In the extreme case, θG ¼ 1 means that there will be no conflict of the far-sighted type and p θG 4 1 is the probability that it is of the
interest and the agent will act in the interest of the principal. short-sighted type. If the agency tries to reduce the severity of
Based on the above analysis, the degree of moral hazard is related the moral hazard problem in period 1, it will search for more
to the density of the charging stations. A higher density in the information, design a menu of contracts, and offer incentive
residential areas is associated with greater loss of welfare for the schemes. Setting ξ1 ¼ 0, the probability that management believes
property management companies. According to the social welfare a short-sighted government agency providing incentive schemes in
maximization of the government agency objective function, there are period 1 is p1 , i.e., p1 ¼ prob ξ1 ¼ 0jθG 41 .
two sources of welfare gains. One is from making EV charging easier If the property management company observes incentive
and the other is mitigating the principal–agent problem of the schemes from the government agency in period 1, the posterior
property management companies. In such cases, social surplus is a probability of the agency being of the far-sighted type is
result of the game between the two players. Therefore, we assume  
 p ξ1 ¼ 0jθG ¼ 1 p θG ¼ 1
q2 ¼ p θG ¼ 1jξ1 ¼ 0 ¼    
Y t ¼ ðCSt  BRt ÞV; ð4Þ p ξ1 ¼ 0jθG ¼ 1 p θG ¼ 1 þp ξ1 ¼ 0jθG 4 1 p θG 41

where Y t is the overall economic return of the society by promotion p θG ¼ 1
¼    
of EVs, including the positive externality. In this model, Y t ¼ p θG ¼ 1 þðp ξ1 ¼ 0jθG 41 =p ξ1 ¼ 0jθG ¼ 1 Þp θG 4 1
ð1 þ αÞF ðI t Þ. V is the return generated through charging pile con- q1 q
¼    ¼  1
struction within the residential area (V will later be normalized to 1), q1 þ 1  q1 ðp ξ1 ¼ 0jθG 4 1 =p ξ1 ¼ 0jθ G ¼ 1 Þ q1 þ 1  q1 p1
and CSt is density of the charging stations in that area. Because of the ð7Þ
increasing number of EV charging piles in the parking lot, the return
from promotion of EVs is increased. BRt is the best response to a Since 0 o p1 o1, we know that q2 4 q1 . If the government
belief of the property management companies and measures the agency provides incentive schemes in period 1, the property
degree of moral hazard, which is positively correlated with welfare management company will believe that the agency is more likely
losses of those companies. A greater loss of welfare by the companies of the far-sighted type. Then, they will reduce the degree of moral
is associated with a higher degree of agent moral hazard. hazard, modify their expectations and behavior in period 2, and
take the desired action.
1) A far-sighted government agency is willing to provide incen- Summarizing these two cases and arriving at the posterior
tive schemes to lessen management's moral hazard and probability of government agency type, we have
8
assigns a lower weight to the charging pile construction via
 < 0 ξ1 4 0
enforcement measures. In the extreme form with θG ¼ 1, the q2 ¼ prob θG ¼ 1jξ1 ¼ : ð8Þ
: q1 þ ð1  q1 Þp1 ξ1 ¼ 0
q1
maximization problem of government agency social welfare
can be expressed as

  To reduce the severity of the moral hazard problem, the
max W ¼ W 1 þ δW 2 ¼ ð1 þ αÞ F ðI 1 Þ þ δF ðI 2 Þ government agencies offer incentive schemes. Incentivizing the
   o
 ð1=2Þ ξ1 þ δξ2  C 1 þ δC 2 ;
2 2 desired action without full information is costly to the principal.
ð5Þ
With respect to constructing charging sites in residential areas, the
where δ A ð0; 1Þ is the discount rate between two periods. most straightforward choice is to offer a certain amount of subsidies
Obviously, a unique optimal solution for the maximization to the property management companies. Based on the optimal
problem is ξ1 ¼ ξ2 ¼ 0. When there is no conflict of interest incentive scheme, the agents weigh these subsidies against welfare
222 T. Wu et al. / Energy Policy 77 (2015) 216–226

loss from the charging pile construction and decide whether their Therefore, they accordingly form an expectation of the agency's
interests align with those of the government agencies. optimal welfare from its policies and actions and make the best
The best response to a belief of property management compa- response. That is,
nies is defined as  
(    BR2 ¼ φ 1  q2 θG  βs2 : ð12Þ
φ 1  qt ξt  βst if 1  qt ξt  βst 4 0
BRt ¼  ; ð9Þ If the government agencies provide incentive schemes in
0 if 1  qt ξt  β st r 0
period 1, management will be more inclined to think the agency
where φ denotes the probability of accidents at the charging sites, is of the far-sighted type and will reduce the degree of the moral
such as explosions, φ A ð0; 1Þ. β denotes the marginal effect of hazard problem in period 2. As a result, the level of social welfare
government agency subsidies on the moral hazard, and β 4 0 and s increases.
represent the amount of those subsidies. The best response function Plugging the best responses of the property management
indicates the response of the property management company to the companies into the social welfare function, we get

  
agency action in each period, with prior probability of agency type in W 2 ¼ θG ð1=2ÞθG  φ 1  q2 θG  βs2  s2  C 2 : ð13Þ
period 1 and posterior probability of this type in period 2.
As discussed above, the property management's moral hazard Eq. (13) represents the social welfare in terms of providing
problem is attributed to the conflict of interest between the certain incentive schemes to the property management companies.
government agency and the property management company. The In period 1, if the government agencies decide to build charging
enforcement measure of government agency installation of char- piles in residential areas through implementing enforcement
ging piles in residential areas reduces the property management measures and refuse to offer the property management companies
company's utility. As a result, without adequate incentive schemes, any subsidy, management will conclude that the government
management's welfare loss is strongly correlated with the density agency is of the short-sighted type, i.e., s1 ¼ 0 ) q2 ¼ 0.
of charging sites in the residential area. That is, a higher density is Social welfare in period 2 can then be represented as
associated with a more severe moral hazard problem.   
W~ 2 ¼ θG ð1=2ÞθG  φ θG  β s2 s2  C 2 : ð14Þ
Based on the best response to a belief of property management
companies, Eq. (4) can be rewritten as Eq. (14) represents the social welfare in terms of building
(  charging piles in residential areas via implementation of enforce-
ξt  BRt  st if 1 qt ξt  β st 4 0
Yt ¼  ð40 Þ ment measures.
ð1 þ αÞF ðI t Þ  st if 1  qt ξt  βst r0
Compared with the short-sighted behavior, if the government
agencies attempt to increase the social welfare in period 2, then
Eq. (4') implies no conflict of interest between the property
the optimal choice is to offer appropriate incentive schemes to the
management companies and government agencies with BRt ¼ 0.
property management companies in period 1, to reduce the degree
Because of certain incentive schemes, the agent acts in the
of the moral hazard problem.
interests of the principal and there is no principal–agent problem.
With BRt 4 0, Eq. (4') implies that the net social welfare gain ~ 2 ¼ θ 2 φq ¼ θ 2 φ q
ΔW 2 ¼ W 2  W G 2 G
 1 4 0: ð15Þ
equals the gain from government agency compulsive regulations q1 þ 1  q1 p1
minus the disutility owing to management's moral hazard.
Eq. (15) shows that the social welfare increases in period 2 by
inducing incentive schemes.
Now, we investigate in more detail the social welfare in
3. Results period 1.
If the government agencies design the incentive mechanism
3.1. Subsidies inadequate to cover agent's welfare loss accordingly and thereby mitigate the moral hazard in the long-
 term, i.e., ξ1 ¼ 0,
In this case, β st o 1 qt ξt . Therefore, the best response (
to a belief of  property management companies is BRt ¼ Y 1 ¼ ð1 þ αÞF ðI 1 Þ ¼ ξ1  BR1  s1 ¼  BR1  s1
φ 1  qt ξ t  β s t . ð16Þ
W 1 ¼ θG ð1 þ αÞF ðI 1 Þ  ð1=2Þξ1 C 1 ¼  θG ðBR1 þ s1 Þ  C 1 o0
2

In period 2, the optimization problem of government agencies is

n o It is seen from Eq. (16) that if the government agency is far-
max θG ð1 þ αÞF ðI 2 Þ  ð1=2Þξ2  C 2
2
sighted, it provides incentive schemes in period 1 to reduce the
ð10Þ
s:t: Y 2 ¼ ð1 þ αÞF ðI 2 Þ ¼ ξ2  BR2  s2 : degree of moral hazard. Such behavior, however, results in disutility
for the agency in period 1, i.e., W 1 o0.

(
Y 1 ¼ ð1 þ αÞF ðI 1 Þ ¼ ξ1  BR1  s1 ¼ θG  BR1
  ð17Þ
W~ 1 ¼ θG ð1 þ αÞF ðI 1 Þ  ð1=2Þξ2  C 1 ¼ θG θG  BR1  ð1=2Þθ2 C 1 ¼ θG ð1=2ÞθG  BR1  C 1
1 G

Since the game covers only two periods, the government If the government agencies build charging piles using compul-
agencies design their optimal policies according to their welfare sive regulations and refuse to offer any subsidies in period 1, s1 ¼ 0,
loss from the moral hazard problem in period 2, i.e., ξ2 ¼ θG . and then ξ1 ¼ θG . Therefore, we have

The level of social welfare in period 2 is Note that if W~ 1 ¼ θG ð1=2ÞθG  BR1  C 1 o 0, the government
 agencies
n neverochoose to build charging stations in residential areas.
W 2 ¼ θG ð1=2ÞθG  BR2  s2  C 2 : ð11Þ max W 1 ; W ~ 1 o 0 implies that the fixed cost C of constructing
a charging pile is extremely high. Then, whether the government
Now, the property management companies know that the agencies decide to provide incentive schemes or not, the optimal
government agencies will choose a welfare-maximizing strategy. strategy for those agencies is not to construct the charging stations
 T. Wu et al. / Energy Policy 77 (2015) 216–226 223

in residential areas. We do not examine this case here, and set (2) Exceedance of threshold p^ 1 . The larger of the prior probability
W~ 1 4 0. indicates that property management companies are more
~ 1 4 W 1 means that the government agencies may
The result W optimistic, and they trust that the government agencies will
indeed gain in the short-term by compulsive regulations and provide appreciable incentive schemes in period 1 and that the
refuse to offer any subsidies in period 1. This can explain the expected subsidy will be extremely large. However, owing to
reason for the decision rule of the short-sighted government subsidy limitations, the actual subsidy is much less than
agency type that ignores the interest of the property management expected. Therefore, social welfare declines substantially in
companies. period 2 from this limitation.
Therefore, one designs the corresponding incentive mechanism
in period 1 and reduces welfare loss in the long-term from the
principal–agent problem as
 3.2. Subsidies adequate to cover agent's welfare loss
~ 1 ¼  θG ðBR1 þ s1 Þ  θG ð1=2ÞθG  BR1
ΔW 1 ¼ W 1  W 
In this case, βst Z 1  qt ξt , and the game model shows that the
¼  θG s1  ð1=2ÞθG o 0:
2
ð18Þ
government agencies and property management companies react
Eq. (18) shows social welfare loss in period 1 from inducing in the same way in both periods, i.e., subsidies can make up for the
incentive schemes. agent's welfare loss and the parties' interests are consistent. This
Therefore, only when gains from period 2 outweigh losses in means that the best response to a belief of the companies is BR2 ¼ 0.
period 1 will the government agencies choose to provide incentive In other words, there is no moral hazard problem and the agencies
schemes in the latter period. can formulate policies in the way they see as optimal. Without loss
of generality, set C 1 ¼ C 2 .
q
δΔW 2 4 ΔW 1 ) ξ22 δφ  1 4 ξ2 s1 þ ð1=2Þξ2 :
2
ð19Þ Social welfare in period 2 can be express as
q1 þ 1  q1 p1
W 2 ¼ θG ½ð1 þ αÞF ðI 2 Þ  s2   C 2 : ð20Þ

Rearrangement of Eq. (19) gives Total two-period utility is

  

δφξ22  ξ2 s1 þ ð1=2Þξ22 q1 W ¼ 1 þ δ θG ½ð1 þ αÞF ðI 2 Þ  s2   C 2 : ð21Þ
0 r p1 o p^ 1 ¼ ; ð19’Þ
ξ2 s1 þð1=2Þξ22 1  q1 Then, we can repeat the analysis as in Section 3.3.1.
  Furthermore, according to the best response of property
Where ξ2 ð1=2Þξ2  BR1 4 C 1 , βst o 1 qt ξt and
management companies, we have
δφ 4 1=2 þ s1 =ξ2 . We denote s1 =ξ2 as a proportion of the subsidy. 
We conclude that the principal–agent problem is significant in 1 q2 ξ2  β s2 o 0: ð22Þ
the government's policymaking process. As long as the property
Rearrangement of Eq. (22) gives
management companies do not assign a very small value to the

posterior probability that the government agencies are of the far- 1  q2 ξ2
s2 4 : ð220 Þ
sighted type, or that those agencies focus on long-term return, the β
agencies can collect feedback from management and design optimal
incentive mechanisms that improve social welfare. When manage- Eq. (22') shows that when subsidies are sufficiently large, com-
ment believes that the risk of accidents (e.g., explosions) is very pensating the agents enhances social welfare by reducing the degree
high, it is important that government agencies pay close attention of moral hazard. In such a case, although the government agencies
to their feedback and offer certain subsidies to reduce the degree of have to pay for subsidies, social welfare benefits from the incentive
management's moral hazard. schemes and incremental benefits could cover the extra cost.
By a numerical method, we can attain more insights and In other words, when the incentive schemes of government
quantitative results of the comparison of Eq. (19). We set para- agencies can reconcile both parties' interests, welfare loss from the
meter values at ξ2 ¼ 10, q1 ¼ 0:80, φ ¼ 0:80, and δ ¼ 0:75. Accord- moral hazard can be fully recovered. In fact, our result is very
ing to Beijing Financial Subsidy Funds Management Rules for New intuitive, and we can interpret it from two perspectives. As an
Energy Vehicles,13 we set the proportion of subsidy as s1 =ξ2 ¼ 4%. example, we consider the case in which the government agencies
As shown in Fig. 3, Region A represents welfare gains from pay for extra costs to reduce the risk of accidents at the charging
period 2 outweighing losses in period 1. The threshold is stations, e.g., through fire safety systems. First, we examine the
  function of a charging station. When a station is sufficiently safe
δφξ22  ξ2 s1 þ ð1=2Þξ22 q
with a very sophisticated fire safety system, in the extreme case,
p^ 1 ¼ U 1 accident risk is eliminated. This risk-free charging station is equiva-
ξ s1 þ ð1=2Þξ2 1  q1
2 2 lent to a bicycle parking facility, and its installation will generate
The following insights are realized. only convenience for local residents. The agents' welfare loss from
accident risk is thereby avoided. Second, we can examine from the
(1) Less than the threshold p^ 1 . The smaller of the prior probability aspect of charging station location. Constructing a charging station
indicates that property management companies are more without risk is equivalent to moving the station far away, which is
pessimistic and do not believe that a short-sighted govern- the same as a gas station. Although gas stations carry safety risks,
ment agency will provide incentive schemes in period 1. In this they are built far from residential areas so property management
case, social welfare will greatly increase in period 2 from companies do not suffer welfare loss from those risks.
inducing incentive schemes, which means that the effect of
reducing the degree of moral hazard of the companies 3.3. Special cases
becomes more obvious and enhances belief.
Suppose a probability p ¼ p1 , for which government agencies
13
Published on March 17th 2014 at http://www.nandudu.com/attachFiles/file/ respond to agents' feedback in period 1 and offer proper incentive
111111_1402471801847.pdf. schemes. We investigate equilibria for two special cases as follows.
224 T. Wu et al. / Energy Policy 77 (2015) 216–226

Fig. 3. Welfare analysis when subsidy is insufficient. Fig. 5. Sensitivity analysis with discount rate.

If government officials are very short-sighted, local government

officials will not give much weight to welfare loss from the moral
hazard problem, which may produce greater social welfare loss in
the long term. Instead, the officials focus solely on short-term
quantity in the construction of charging stations and promotion of
opportunities. By contrast, for a patient and far-sighted govern-
ment agency, to realize long-term social welfare, it will continu-
ously fine-tune the incentive mechanisms it offers until the two
parties' interests become consistent. Only then will it implement
the policies, after making short-term sacrifices.

4. Discussion

In this section, we perform sensitivity analysis for case one

(in this case, subsidies inadequate to cover agent's welfare loss) as
an example. According to Eq. (19) and an analysis shown in Fig. 3,
the key result of the model is the range of Region A (in this region,
Fig. 4. Sensitivity analysis with probability of accidents. welfare gains from period 2 outweigh losses in period 1).

4.1. Increase in probability of accidents of charging stations φ

3.3.1. Government agency is short-sighted type
In this case, p ¼ 0, and then we have
  Fig. 4 shows probabilities of accidents at charging stations
δφξ22  ξ2 s1 þð1=2Þξ22 q1 in different ranges of Region A. As the probability changes from
0 ¼ p1 o p^ 1 ¼ : ð23Þ 0.80 to 0.85, welfare in period 2 increases. This is mainly because
ξ2 s1 þ ð1=2Þξ22 1  q1
of the higher probability of accidents at charging stations and the
Rearrangement of Eq. (23) gives increased moral hazard and opposition of property management
companies. Therefore, efficiency of the incentive scheme improves
2s1 þ ξ2
δ 4 δ^ ¼ : ð23’Þ and the posterior probability of government agencies of the
2φξ2 far-sighted type increases.

3.3.2. Government agency is far-sighted type

4.2. Increase of discount rate between the two periods δ
In this case, p ¼ 1, and then we have
2s1 þ ξ2 1 1
¼ δ^ :
Fig. 5 portrays discount rate results in different ranges of
1 ¼ p1 o p^ 1 ) δ' 4 ð24Þ
2φξ2 q1 q1 Region A.
As the discount rate increases from 0.70 to 0.75, welfare in
period 2 increases. This is mainly because a higher discount rate
3.3.3. Comparison of two cases means that patient and far-sighted government officials care more
Comparing the two cases above, if q1 o1, then δ^ ð1=q1 Þ 4 δ^ , about long-term effects, which may help management revise their
which is consistent with intuition. prior probability.
 T. Wu et al. / Energy Policy 77 (2015) 216–226 225

3) The quantity of constructed charging station should be used

carefully as a criterion of evaluating the performances of a
government official assess carefully. If the office terms of
government officials are relatively short, responsible officials
have incentive to ignore feedback from property management
agencies. In such cases, long-term effects of installing charging
piles focus exclusively on achieving short-term benefits and
promotion opportunities. With this in mind, when evaluating
the performance of a government official, we should avoid the
potential moral hazard problems.
4) When designing policies regarding charging station construction,
a government agency must consider all factors and have global
consciousness. Given consistent government policies, even if
government agencies' policies are far-sighted or many elements
are unknown to property management companies during early
periods, those companies will gradually obtain more relevant
information and update their beliefs per the observable behavior
of government agencies. The two relevant parties in our study are
the government agency and property management company.
Fig. 6. Sensitivity analysis with degree of moral hazard. When attempting to make charging easier for the public, govern-
ment agencies must also consider reactions from management
4.3. Increase of degree of moral hazard ξ2 companies. Smooth installation of charging piles in residential
 communities is only a good start; their long-term use, main-
We define ΔW ¼ δΔW 2  ΔW 1 ¼ ξ2 δφq þ 1q1 q p  ξ2 s1 þ
2
tenance, and other uncertainties are equally important. Because
ð 1Þ 1
ξ which indicates net social welfare improvement by providing
1 2 1

2 2 Þ, construction of EV charging infrastructure does not occur simul-

incentive schemes. taneously in all regions, this is going to be a learning process for
As shown in Fig. 6, the subsidy level remains unchanged (s1 is both residents and property management companies.
constant), and varying degrees of moral hazard produces different
values of ΔW. As ξ2 increases from 10 to 15, ΔW increases in
Region A. In this case, although the subsidy is insufficient, social
welfare greatly increases in period 2 from inducing incentive Acknowledgments
schemes below the threshold. Because of the amplification of
belief, the limited subsidy could outweigh the skepticism of The project was co-sponsored by the National Natural Science
property management companies and cover the welfare loss from Foundation of China (71103109, 71203119, 71373212, and
the moral hazard problem. Therefore, the greater the removals of 71373142), National Social Science Foundation of China
the negative affect of the moral hazard, the greater the welfare (14ZDA052), Beijing Special Fund for Joint Construction with State
gains in period 2. Since the prior probability p1 exceeds the Owned Universities (Excellent Ph.D. Degree Thesis Tutor Fund
threshold, the negative effect of the moral hazard dominates. 20111000301), and Beijing Higher Education Young Elite Teacher
Project (YETP0160).

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