Dynamic Incentive Mechanism for Large-scale Projects Based on the Reputation Effects

Abstract

Large-scale projects play an important role in social and economic development. Recently, large-scale projects are becoming more complex with more uncertainties and risks during the construction, which leads to more complex and extensive management problems. In a large-scale project, there is a principal-agent relationship between the contractor and owner. The contractor may take moral hazard behavior to pursue his/her own interests due to the information asymmetry and conflict of interest, which could damage to the public and owner’s interests. Based on the principal-agent theory, a dynamic incentive model combining explicit and implicit incentives was constructed in large-scale projects, after analyzing the mechanism of reputation effects. A comparison was made between two scenarios. One scenario considered reputation effects; the other did not consider reputation effects. The results show that the contractor would be more inclined to make optimal efforts in the large-scale project after reputation effects are introduced, and this optimal effort level will improve with the increased influence degree of reputation effects. However, the contractor’s degree of risk aversion will weaken the incentive effects. In addition, compared to an explicit incentive, the reputation mechanism of an implicit incentive will increase the owner’s benefits. The findings not only provide important support for the owner to formulate relevant incentive clauses in the construction contract, but also has important practical significance for the construction of the micro-institutional environment in construction projects. This study did not take into account factors such as regulatory efficiency when establishing the reputation incentive model. How to combine reputational incentives with the degree of supervision will be the direction of future research.

Risks Caused by Information Asymmetry in Construction Projects: A Systematic Literature Review

“…The simulation was combined with case studies in three other articles [50,55,56]. Furthermore, the simulation method is used to design optimal incentive contracts [30,[59][60][61][62][63][64][65]. It is also used to explore the impact of other incentive mechanisms, such as cooperation and reputation [66,67].…”

“…Finally, the agent can also engage in opportunistic behavior because of moral designment. They justify their own immoral or opportunistic behavior because (1) they are in an environment (company or market) that behaves in the same way or (2) individuals often try to reduce responsibility for their actions and transfer it to others (for example, the contractor claims that he did something for the benefit of the project and not for his own profit) [29,64,65,73,87,93,98,124].…”

“…These consequences include failure to achieve project objectives, poor relationships and collaboration between project participants, and, in the long term, a decline in industrial productivity. Consequences on project objectives are related to project cost [34,74,77,78,91,96,99], schedule [48,56,96], quality [51,59,[64][65][66]85,126], profitability [47,60,65,74,77,78,126], building usability [83] and the effects of new technology and innovation [10,45,46,71,80]. These risks also hinder future collaboration between the project participants [85], produce disputes [48][49][50] and endanger honest cooperation and communication between the participants [30,65,74,77,78,93,97].…”

“…They can also calculate the optimal bid to prevent dumping [69]. When choosing agents, clients should pay attention to their organizational culture [79,82,122], reputation [43,47,50,52,64,79,82,102] as well as partnering and long-term relations [75,84,85].…”

“…Also, the project should have a proper reporting system and monitoring of contract execution [12,34,58,59,81], as well as an agent per-formance evaluation system [29]. Authors often speak of this type of contract as optimal [12,57,59,64,65,86,93,[99][100][101]103].…”