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ABSTRACT. Moral hazard and opportunism is an inherent part of contracting and procurement strategies, especially in complex transactions that require co-creation, which is often the case in the construction industry. This paper clarifies the meaning of moral hazard in the context of construction procurement. Typically there is a double moral hazard problem, as not only the supplier, but also the client can “misbehave” in a number of ways. It is also important to note that both internal moral hazard (within the client and contractor organizations) and external moral hazard (between client and contractor) must be handled. The aim of this conceptual 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 investments. These can be grouped into two ideal types; hard/formal and soft/informal strategies, of which the first is most suitable in simple and standardized projects, whereas soft/informal strategies are better in complex and uncertain projects. pp. 7–33
JEL codes: L74; N6

Keywords: moral hazard; opportunism; procurement; contracting; construction projects

How to cite: Eriksson, Per Erik, and Hans Lind (2016), “Strategies for Reducing Moral Hazard in Construction Procurement: A Conceptual Framework,” Journal of Self-Governance and Management Economics 4(1): 7–33.

Received 27 April 2015 • Received in revised form 2 July 2015
Accepted 3 July 2015 • Available online 15 September 2015

doi:10.22381/JSME4120161

PER ERIK ERIKSSON
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Department of Business Administration,
Technology and Social Sciences,
Luleå University of Technology
HANS LIND
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Department of Real Estate
and Construction Management,
KTH, Royal Institute of Technology

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