Economics of trust in construction

Abstract

As shown by both empirical research and theoretical foundations of economics, sociology, and psychology, trust is central to construction projects. However, many papers in the construction management and economics fields investigate trust empirically without proper theoretical foundations. This chapter demonstrates the importance of trust in construction economics through application of the principal-agent theory, a part of the New Institutional Economics. According to this theory, information asymmetry between project participants leads to communication risk. Trust minimises information asymmetry and thus it reduces the communication risk. Building trust and creating a reputation for trustworthy behaviour is valuable for every project. In construction projects, trust is essential because the non-contractual relationships dominate contractual relationships especially in the construction phase. Studies on trust in construction projects should focus on both empirical research and its theoretical foundation. A closer relationship between researchers and practitioners in the field would eventually lead to the advancement of both theory and practice.