Research On Incentive Mechanism For Real Estate Enterprise Cost Management With Asymmetric Information

Impacted by macro-control, project cost leadership has become one of the corecompetencies in real estate business. A number of real estate enterprises have proposed theconcept of value creation, shifting the cost management focus forward and conducting the targetcost management. However, the "target cost" of many domestic enterprises is not analyzedthrough value engineering; instead, it is estimated from the construction cost index, thus it isactually the "liability cost". The "target cost management" cannot meet the needs of costmanagement due to the ubiquitous asymmetric information at the project early stage. This studytakes the cost management in real estate enterprise in the context of asymmetric information asthe starting point, adopting game theory, mathematical programming, statistical and numericalanalyses and other methods. Through the theoretical and empirical analysis, it is found that inthe context of asymmetric information, the use of target cost management will expand the gamebetween the agent and the principal, causing the ratchet effect, which is unfavorable for resourceintegration and value creation, and resulting in deteriorating quality though the costs are undercontrol. Therefore, it is necessary to change the status quo of "controlling" instead of“managing” in the cost management of real estate.Firstly, the findings of cost management and the incentive theories at home and abroadhave been summarized, the development process of cost management and related methods havebeen discussed, analyzing the status quo of China’s real estate cost management, elaborating thetheoretical analysis on incentive mechanism and application-oriented model. Secondly, on thebasis of the theoretical analysis, various cost management strategies have been proposedrespectively for different stages of project development, different agent services and differentsituations of symmetric and asymmetric information. Moreover, new solutions have been madefor refined cost management, pointing out the pitfalls in refined cost management, thusincreasing the cost driver analysis and advocating the integration of target cost and operatingcost management. Then, in the context of the asymmetric information, the incentivemanagement practices have been introduced to motivate vicarious liability cost control,reducing the game to encourage agents to integrate resources and value creation. Finally, thearticle has improved the cost management process of the current project, put forward the newmanagement process, and introduced incentive management into the feasibility study andschematic design phase to adapt to the characteristics of the cost of the earlier stage of theproject.The promotion and application of the traditional incentive mechanism has been hindered due to its limitations with too many parameters, unreasonable incentive strength, notconforming to the operating practices and so on. Therefore, a new application-oriented activeincentive model is built in this paper, changing the linear incentive of traditional model andincreasing the incentive strength, so that the reward and punishment mechanism can becomemore scientific; it solves the limitations of the traditional model and can reduce the game risksof the agent and the principal; it can effectively prevent the ratchet effect, making it common forthe agents to keep working hard, so that it can better meet the cost management in the context ofasymmetric information at the early stage of a real estate project. In addition, adopting the activeincentive model can effectively replace the Analysis Model of Spence’s Job Market SignalingModel, and reduce the deviation of information transmission, enabling the real estate business tofind about the highly capable agents who are willing to work harder for agency affairs. In thisstudy, the optimal planning models have been established and analyzed for the reverse selectionand moral risk issues respectively under the model. And the following has been found:1. Concerning the issue of reverse selection, the model makes sure that there is nodistortion in the output levels of high professional-level agents and low professional-levelagents compared with those when the information is complete. It effectively avoids thetendency of high professional-level agents following the example of low professional-levelagents, and also makes the output of the low professional-level agents maintain the optimumlevel, making it unnecessary for the real estate enterprises to raise the output criteria. Therefore,the agents will be more willing to accept the contract entered into under the active incentivemechanism, effectively encouraging the agents to increase the labor and resource allocation, sothat the agent’s productivity can be improved.2. Concerning the issue of the moral risk, the active incentive mechanism can motivate theagent to reach the same level of effort as in the context of information symmetry with smallercommission rate, and guide the agent to bravely report the real output level at the initial stage ofcontract period. The rational agents will take real actions according to their own capability andresources when handling agency matters. In the meantime, the study also points out the factorsimpacting the incentive effect and risk, including effort influence coefficient, externaluncertainty factor, absolute risk aversion measure and commission rate and etc, and analyzes theinteraction among these factors.The paper also proposes the strategy for integration and long-term cooperation, as anextension and a supplement to the incentive mechanism considering that the builders may takeall surplus value and the incentive mechanism may become uneffective to them. The modelinganalysis shows that the external agency is converted to the internal agency by the integration strategy, which can expand the incentive efforts; in particular, it can solve the problem of theincentive mechanism failing to have the optimal solution to the external builder problem. Itshows through dynamic game analysis that the agent will maintain better reputation and keepworking hard in order to earn more revenue in the future in the long-term cooperation.Finally, through the variance analysis of development cost data in23real estate projects inGuangzhou, it is found that the system errors of subdivisional projects are relatively discrete,with the minimum (preliminary project work) being14.9%, and the maximum (electrical andmechanical work) being81.8%. It indicates that there is big uncertainty in the engineering costsof different projects, which results in prevalent asymmetric information in the preliminary stageof project development and confirms that there are some drawbacks in the traditional singleliability cost management. Meanwhile, a calculation example demonstrates that the activeincentive mechanism can be well applied to the internal and external agency affairs of realestate enterprises, which is rather practical and is able to achieve good results and solve theproblems of reverse selection and moral risks to a certain extent.In summary, existing real estate enterprises have shifted the focus of cost management topreliminary stage of project development. Although the "timing" of cost control is under goodcontrol, the "space" of cost control is ignored, and inadequate consideration has been given tothe impact of asymmetric information and cost causes. This paper analyzes the features of costmanagement in the context of asymmetric information, and proposes the idea of motivatinginstead of controlling to adapt to the needs of cost management of real estate enterprises in thenew situation. Macrocosmically, it helps optimize resource allocation and reduce social andeconomic wastes. Microcosmically, it aids real estate enterprises in creating value, enhancingcompetencies.