Working Paper Series, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), Royal Institute of Technology
Moral hazard and construction procurement: A conceptual framework
() and Hans Lind
Abstract: The first aim of this paper is to clarify the meaning of
moral hazard in the context of construction procurement. Two important
points are that typically there is a double moral hazard problem, as the
client also can “misbehave” in a number of ways, and that both internal
moral hazard (within the client and contractor organization) and external
moral hazard (between client and contractor) must be handled.
second aim of the paper is to give an overview of strategies to reduce the
risk of moral hazard. Eight different strategies are identified: 1) “the
shadow of the 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 the contract, 5) payment systems, 6)
monitoring intensity, 7) social norms, and 8) relation specific
At the end of the paper a number of questions for future
research are identified. Can the strategies be grouped into an ideal type
of hard/formal strategies (with e.g. detailed contracts, more monitoring,
and choose the bidder with the lowest price) and soft/informal strategies
(with e.g. long term relations and more flexible contracts)? How are
methods used internally and methods used externally to reduce moral hazard
related? What are the differences in these respects between private sector
procurement and public sector procurement methods?
Keywords: moral hazard; procurement; (follow links to similar papers)
JEL-Codes: R32; R38; (follow links to similar papers)
26 pages, January 26, 2015
This paper was written as part of the ProcSIBE-project (Procurement for Sustainable Innovations in the Built Environment.
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