Abstract: This paper examines the moral hazard issues arising-from the pay-off ext ernalities and the private monitoring in infrastructure projects, and also investigates the effectiveness of BOT project by introducing penalty clauses and competitive tendering.The payoff externality refers to a situation that the level of effort exerted by the private sector in the construction period influences the cost occurring in the operation period.The moral hazard can not be deterred by the penalty clauses and competitive tendering, if the project is carried out by the traditional scheme.On the other hand, the moral hazard can be efficiently deterred by the BOT concession contract with a single agent internalizing the pay-off externality, as far as the project company is forbidden to quit from the contract throughout the contract periods.However, the efficiency of the BOT scheme is flawed if the breach of the contract can be made by the limited-liability company under limited recourse principle.The paper is concluded by the remark that the social efficiency is accomplished by applying deposit system which is valid to deter the moral hazard.

Key words: payoff externality, moral hazard, traditional scheme, BOT scheme, effectiveness