The emerging prefabricated decoration (PD) sector in China offers a compelling avenue for revolutionizing the construction industry, aligning with the imperatives of sustainability and industrialization. However, the outlook for the diffusion of PD in China's construction industry is less than promising. The development of PD is closely related to its value creation and the intricate interplay of stakeholder strategies and their ramifications on PD's value co-creation necessitates thorough exploration. Based on evolutionary game theory, this study elucidates the dynamic interactions among local governments, developers, and decoration contractors in China's evolving PD landscape. A tripartite evolutionary game model was established, investigating the evolutionary stable equilibriums and the corresponding strategies. Then, an empirical analysis in Chongqing City validates the game models and primary conclusions. Scrutinizing subsidy thresholds, local subsidy biases, PD proportion in prefabrication, and binary innovation allocation, the research unveils nuanced insights pertinent to boosting PD's value co-creation. Findings advocate an assembly rate threshold of subsidy (65%–70 %) and a shift towards incentivizing decoration contractors to catalyze PD adoption. Additionally, excessive PD proportion and immature product investments may hinder industry development, prompting stakeholders to recalibrate strategies dynamically. These findings characterize the mechanisms of stakeholder value co-creation during the PD diffusion, enriching the implications of value co-creation theory in the emerging industry of the construction sector. They also furnish stakeholders committed to promoting the diffusion of PD in the domestic and international construction sectors with practical strategic guidance, particularly tailored for cities in the early stages of PD development.
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