RESEARCH ARTICLE


Preventing Adverse Selection Risk of Construction Project Based on Signaling



Pengcheng Xiang*, 1, Xiangnan Song2
1 Professor in the Faculty of Construction Management and Real Estate, Chongqing University, P.R. China and a senior research fellow of Research Center of Construction Economics and Management, Chongqing University, 400045, P.R. China
2 Master student in the Faculty of Construction Management and Real Estate, Chongqing University, P.R. China and a member of Research Center of Construction Economics and Management, Chongqing University, 400045, P.R. China


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Creative Commons License
© 2014 Xiang and Song;

open-access license: This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International Public License (CC-BY 4.0), a copy of which is available at: https://creativecommons.org/licenses/by/4.0/legalcode. This license permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

* Address correspondence to this author at the Professor in the Faculty of Construction Management and Real Estate, Chongqing University, P.R. China; E-mail: bassey69@yahoo.com


Abstract

In the construction market, the adverse selection is very prone to occur as a result of the current situation that the two parties’ information is asymmetric, which causes the construction market disorder and uncontrolled market behaviors. For example, in the bidding phase of the project, the owner doesn’t know clearly of the contractor's technical strength, level of management, service quality, and so on; also the contractor is unclear of the owner’s intention of building, financial capacity, and business reputation etc. at the same time, which leads to adverse selection of bidding market because of inaccurate judgment of the actual risk situation and strength of the contractor. In order to preventing this construction project risk ,this paper is to apply asymmetric information theory to project risk management and finally proves that the contractor 's strength can become the deferent signal of the risk type of the contractor through the analysis of the signaling model based on the contractor’s strength. Meanwhile, the owner can judge the risk type of the contractor by acquired the strength and pretended cost of bidding. It is helpful to solve the problem of adverse selection by founding an effective mechanism of signaling, thereby preventing construction project risk.

Keywords: Adverse selection, construction project risk, information asymmetries, risk management, signaling.