Can reputation system complement limited inspection accuracy in deterring opportunistic claims?

Abstract

PurposeIn construction projects, engineering variations are very common and create breeding grounds for opportunistic claims. This study investigates the complementary effect between an inspection mechanism and a reputation system in deterring opportunistic claims, considering an employer with limited inspection accuracy and a contractor, which can be either reputation-concerned or opportunistic.Design/methodology/approachThis paper applies a signaling game to investigate the complementary effect between the employer's inspection and a reputation system in deterring the contractor's possible opportunistic claim, considering the information-flow influence of claiming prices.FindingsThis study finds that in the exogenous-inspection-accuracy case, the employer does not always inspect the claim. A more stringent reputation system complements a less accurate inspection only when the inspection cost is lower than a threshold, but may decline the employer's surplus or social welfare. In the optimal-inspection-accuracy case, the employer always inspects the claim. However, only a sufficiently stringent reputation system can guarantee the effectiveness of an optimal inspection in curbing opportunistic claims. A more stringent reputation system has a value-stepping effect on the employer's surplus but may unexpectedly impair social welfare, whereas a higher inspection cost efficiency always reduces social welfare.Originality/valueThis article contributes to the project management literature by combing the signaling game theory with the reputation theory and thus embeds the problem of inspection mechanism design into a broader socio-economic framework.