Formal And Informal Controls Of Double Moral Hazard Issues In Construction Projects

Since China's reform and opening-up,construction industry has developed rapidly in infrastructure and civil architecture and many other fields,which has gradually become a pillar industry of national economy.There are many participants involved in construction project and the owner and the contractor are the core,their cooperative behaviors have a critical impact on the project success.However,the owner and the contractor may both also act opportunism behaviors and then induce double moral hazard issues for the results of their inconsistent benefits during the cooperation.Formal control can restrain opportunism behaviors of both the owner and the contractor to a certain degree by detailed formal contract terms.At the same time,trust,renqing and some other informal controls can not only coordinate the exchange of information and resources but also incentive both sides to develop their effort levels,which ensures the smooth implementation of construction project.In order to restrain the occurrence of double moral hazard for the owner and the contractor and improve their effort levels to enhance the project performance,this paper bases incomplete contracting theory and relational contract theory to respectively study the function mechanisms of formal and informal controls on restraining the occurrence of double moral hazard as well as their interaction relationships.The main contents are as follows:First,for the cost overrun risk caused by the unverifiable effort levels of both the owner and contractor,this paper uses game theory to formulate formal contract model for construction project and analyzes the mechanisms that generate double moral hazard where both the owner and the contractor are involved as well as the impact of penalty.The results show that neither the contractor bearing all the cost overrun risk nor the owner setting penalty can restrain the occurrence of double moral hazard and the contract breach at the same time.Whereas the optimal cost overrun risk sharing mechanism can be designed to realize both ex-ante and ex-post project efficiency and minimize the expected cost of the owner.Then,this paper formulates a game model where formal and informal controls jointly restrain the occurrence of double moral hazard to further analyze function mechanisms of formal and informal controls.The results show that introducing trust and some other informal controls in formal contract can not only effectively coordinate the cooperative behaviors of both the owner and the contractor but also incentive their own effort levels,which thereforecan better restrain the occurrence of double moral hazard and the contract breach at the same time than the separate effect of formal control.Last,in China's social environment with guanxi-orentation,this paper builds a theoretical research model of formal and informal controls wherein formal contract,trust(goodwill trust and competence trust)and renqing are as the main research objects to analyze the interaction relationships of formal and informal controls on the effects of restraining the occurrence of double moral hazard.The results show that formal contract can directly restrain the opportunism behaviors of both the owner and the contractor whereas trust not only enhances effort levels for both sides in a direct way but also has effect on restraining the occurrence of double moral hazard by acting on formal contract.And the function of goodwill trust and competence trust respectively substitutes and supplements the function of formal contract.Renqing also has the direct effect on restraining the occurrence of double moral hazard.Moreover,it plays a positive role in moderating the influences of formal contract and trust on restraining the occurrence of double moral hazard of the owner and the contractor.In other words,in China,it depends on renqing to bring the roles of both formal contract and trust on restraining the occurrence of double moral hazard into play.