Public-private partnership (PPP) has emerged as a new mode for governments to attract potential partners in infrastructure construction, in which the investment allocation is a complex problem. This study explores an approach to managing the uncertainty involved, in the assessment and investment-allocation decisions of PPP projects. Real options and game theory are applied to dispose the uncertainties related to flexibility and distribution of investment in PPP, and these two methods were organically integrated as a new model. The Real Option- Game Theory (RO-GT) model, capable of flexibly handling investment-allocation risk in PPP projects into account. Black Scholes (B-S) real options model and Nash equilibrium are used to analyze the data. The results of RO-GT model indicate that the value of flexibility plays a significant part to the total investments. Additionally, the case study of Beijing metro line 4 reveals a proper allocation plays an important role in the long-term operation of PPP projects. The study is a significant supplement to the existing literature that supports in negotiating the exact investment in PPP projects. The new model provides the PPP stakeholder groups with a quantitative decision making model and an available approach to eliminate the uncertainties of investment allocation in PPP projects.
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