Abstract
In construction projects, some contractors will take default actions against the contracts to obtain maximum profits and damage the owners’ benefits as a result. In the construction markets where effective supervision is not performed well, contractors have more opportunities to default. Surety bonds were designed to solve the default problems and promote the sustainable development of the construction markets. This paper was proposed to explore the interactions between owners and contractors and investigate the influence of surety bonds (high penalty and low penalty) on the default behavior of contractors based on a static and dynamic evolutionary game analysis model. The results showed that applying the surety bond strategy is effective at decreasing the probability of the contractors’ default behavior when the credit system based on a surety bond system is well developed in the construction industry and the cost of the surety bond is low enough. Therefore, government strategies such as a better development of the credit system driven by surety bonds and the subsidies on surety bonds to reduce the cost can mitigate the contractors’ default behavior and keep the sustainability of the construction markets.
Highlights
Construction projects generally involve a large upfront investment, long-term implementation and many stakeholders [1,2,3,4,5]
If the information of contractors from surety institutions can be exchanged through a specific platform, the construction market credit system (CMCS) can be established to better restrict the default behavior and support the sustainable development of the construction industry
We propose six assumptions: (1) the financial and operational capacity of contractors is good enough, so the default behavior of contractors is subjective; (2) the owners will not default, as regulations such as the contractors’ priority of compensation will ensure that the owners pay the cost of contractors; (3) surety bond institutions obey all the regulations; (4) the contractors’ profits under the “default” strategy are higher than the profits under the “not default” strategy, which is the incentive for the contractors to choose the “default” strategy; (5) generally, the contractors’ claim on additional cost caused by the owners will be included in the revenues of the contractors
Summary
Construction projects generally involve a large upfront investment, long-term implementation and many stakeholders [1,2,3,4,5]. The contractors tend to maximize their profits through default behavior in the construction projects. This leads to the distortion of credit in the construction industry and default risk. Surety bonds have been introduced as a risk transfer instrument to protect the owners from the default risk of the contractors and keep the sustainability of the construction markets, especially for the markets without effective supervision.
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