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Moral hazard and construction procurement: A conceptual framework
Luleå University of Technology. (Department of Business Administration, Technology and Social Sciences)
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.ORCID iD: 0000-0003-4841-5056
2015 (English)Report (Other academic)
Abstract [en]

The first aim of this paper is to clarify the meaning of moral hazard in the context ofconstruction procurement. Two important points are that typically there is a doublemoral hazard problem, as the client also can “misbehave” in a number of ways, andthat both internal moral hazard (within the client and contractor organization) andexternal moral hazard (between client and contractor) must be handled.The second aim of the paper is to give an overview of strategies to reduce the risk ofmoral hazard. Eight different strategies are identified: 1) “the shadow of the future”,promises of future work if effort is high 2) selection mechanism forcontractor/employee, 3) length of contract, length of warranties, 4) level of detail inthe contract, 5) payment systems, 6) monitoring intensity, 7) social norms, and 8)relation specific investments.At the end of the paper a number of questions for future research are identified. Canthe 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 flexiblecontracts)? How are methods used internally and methods used externally to reducemoral hazard related? What are the differences in these respects between privatesector procurement and public sector procurement methods?

Place, publisher, year, edition, pages
KTH Royal Institute of Technology, 2015. , 26 p.
, Working Paper Series, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), 15/2
Keyword [en]
moral hazard, procurement
National Category
Economics and Business
URN: urn:nbn:se:kth:diva-159237OAI: diva2:783674

QC 20150205

Available from: 2015-01-26 Created: 2015-01-26 Last updated: 2015-02-05Bibliographically approved

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