Abstract
Moral hazard and opportunism is an inherent part of contracting and procurement strategies, especially in complex transactions that require co-creation, which is often case in construction industry. This paper clarifies meaning of moral hazard in context of construction procurement. Typically there is a double moral hazard problem, as not only supplier, but also client can misbehave in a number of ways. It is also important to note that both internal moral hazard (within client and contractor organizations) and external moral hazard (between client and contractor) must be handled. The aim of this conceptual paper is to give an overview of strategies to reduce risk of moral hazard. Eight different strategies are identified: 1) the shadow of future, promises of future work if effort is high 2) selection mechanism for contractor/employee, 3) length of contract, length of warranties, 4) level of detail in contract, 5) payment systems, 6) monitoring in- tensity, 7) social norms, and 8) relation specific investments. These can be grouped into two ideal types; hard/formal and soft/informal strategies, of which first is most suitable in simple and standardized projects, whereas soft/informal strategies are better in complex and uncertain projects. JEL codes: L74; N6
Published Version
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