Construction Project Risk Management Based on the View

of Asymmetric Information
Pengcheng Xiang1; Jin Zhou2; Xiaoyu Zhou3; and Kunhui Ye4

Abstract: Construction projects are facing a greater number of uncertainties and more severe risks, which could cause much bigger losses
than in the past. From the perspective of information economics, asymmetric information gives rise to opportunistic behavior, which is the
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primary cause of loss of faith and increased risk in the construction market. Asymmetric information theory is helpful for solving problems
arising in construction projects and for preventing construction project risk. The main objective in this paper is to explore risk prevention
mechanisms and measures in construction projects on the basis of asymmetric information theory. The research processes are (1) exploring
the relationship between asymmetric information and construction project risk and exploring the mechanisms of construction project risk
formation on the basis of asymmetric information; (2) analyzing the issue of asymmetric information in construction projects and creating an
information model of construction project management; (3) proposing measures for resolving information asymmetries of construction
projects. The contributions to the literature are (1) an application of asymmetric information theory to construction project management,
confirming that asymmetric information theory is helpful for resolving problems and preventing construction project risk; (2) showing that
incomplete information, especially asymmetric information, is the essential cause of construction project risk. DOI: 10.1061/(ASCE)CO
.1943-7862.0000548. © 2012 American Society of Civil Engineers.
CE Database subject headings: Construction management; Risk management; Project management; Asymmetry; Information systems.
Author keywords: Asymmetric information theory; Construction project risk; Project management; Construction project risk
management; Construction project management.

Introduction
As a result of global economic growth, technological progress,
large-scale changes in economic structures, and increasingly fierce
market competition, construction projects will face a greater num-
ber of uncertainties and more substantial risks in the future, which
will lead to bigger losses. From the point of view of information
economics, asymmetric information gives rise to opportunistic
behavior, namely, adverse selection and moral hazards, which is
the primary cause of breaking faith in the construction market
and essentially drives construction project risk (Sha et al. 2004;
Ren et al. 2004; Xiang 2005; Xiang and Ou 2009; Xiang and Ren
2010; Xiang et al. 2006, 2007; Xiang and Xie 2008). Asymmetric
1
Associate Professor, Faculty of Construction Management
and Real Estate, Chongqing Univ., P.R. China; Senior Research Fellow
of Advanced Construction Management Research Center, Chongqing
Univ., P.R. China, 400045 (corresponding author). E-mail: pcxiang@cqu
.edu.cn
2
Master Student, Faculty of Construction Management and Real Estate,
Chongqing Univ., P.R. China; Member of CIOBSC, Chongqing Univ.,
P.R. China, 400045. E-mail: Amanda728@126.com
3
Master Student, Faculty of Construction Management and
Real Estate, Chongqing Univ., P.R. China, 400045. E-mail: xyzxiaoyu@
126.com
4
Associate Professor, Faculty of Construction Management and Real
Estate, Chongqing Univ., P.R. China; Senior Research Fellow of Advanced
Construction Management Research Center, Chongqing Univ., P.R. China,
400045. E-mail: Kunhui.YE@gmail.com
Note. This manuscript was submitted on April 13, 2011; approved on
February 29, 2012; published online on March 3, 2012. Discussion period
open until April 1, 2013; separate discussions must be submitted for indi-
vidual papers. This paper is part of the Journal of Construction Engineer-
ing and Management, Vol. 138, No. 11, November 1, 2012. © ASCE,
ISSN 0733-9364/2012/11-1303-1311/$25.00.
information theory can explain these dynamics and has become
widely applicable in this context. Because project risk is becoming
an increasingly serious problem in the Chinese construction
market, it is important to apply asymmetric information theory
to construction project risk management.
Asymmetric information theory assumes a situation in which
one party involved in a transaction has more or superior informa-
tion than another. This often happens in transactions where the
seller knows more than the buyer, although the converse can
happen as well. This is a potentially harmful situation as one party
can take advantage of the other party’s lack of knowledge. The
phenomenon of information asymmetry appears everywhere and
has been studied since the pioneering work of Akerlof (1970);
Spence (1973, 1978); Stiglitz (1972, 1975); and Rothschild and
Stiglitz (1976). These three established the foundations of asym-
metric information theory and received the 2001 Nobel Prize in
Economic Sciences, “for their analyses of markets with asymmetric
information” (Nobel Foundation 2001). In short, the advent of
asymmetric information theory provided a revolutionary break-
through in economics research.
The theory of markets with asymmetric information has been
a lively field of economics research for more than two decades.
Today, models with imperfect information are indispensable instru-
ments in the researcher’s toolbox, with applications extending from
traditional agricultural markets in developing countries to modern
financial markets in developed economies. In recent years, asym-
metric information theory has been at the core of information
economics and has been used widely in fields such as finance, in-
surance, job markets, auction markets, venture capital and business
administration (Coller and Yohn 1997; Hellwig 2001; Sheng 2003;
Garmaise and Moskowitz 2004; Iyer et al. 2005).
Asymmetric information means that some participants possess
information that others do not. For example, a trader may obtain

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J. Constr. Eng. Manage. 2012.138:1303-1311.

 some private information of which the other traders have no knowl-
edge. The trader with this information can take strategic advantage
of it for his or her own profit. The realities of market transactions
are entirely different from the neoclassical analysis of market
equilibrium with complete information, because the existence of
information asymmetry causes difficulties with achieving Pareto
efficiency. In the study of asymmetric information, one who
possesses an information advantage is usually known as the agent,
while one who is at a disadvantage is called the client. The agent
can use their information advantage to perform some adverse
behavior for their own benefit, which raises the two central prob-
lems in asymmetric information theory: adverse selection and
moral hazard (An 2001; Liu 2002).
In recent years, the application of asymmetric information
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theory to construction project management has been explored,
where it can help solve problems and reduce construction project
risk arising from asymmetric information (Zhang and Li 2002; Sha
et al. 2004; Xiang 2005; Xiang and Ou 2009; Xiang and Ren 2010;
Xiang et al. 2006, 2007; Xiang and Xie 2008; Bergmann and Friedl
2008). The major objective is to explore risk prevention mecha-
nisms in construction projects on the basis of asymmetric informa-
tion theory, and some measures for construction project risk
management in China will be proposed. In this paper, we will first
explore the relationship between asymmetric information and con-
struction project risk. Second, we will examine the mechanisms of
construction project risk on the basis of asymmetric information.
Third, we will analyze the issue of asymmetric information in con-
struction project management and create an information model for
construction project management. Finally, we will propose some
measures for resolving information asymmetries in construction
projects, such as strengthening regulations, putting incentives and
constraints in place, strengthening sincerity, and methods of early
risk warning.
Previous Studies
Several researchers have recently explored the application of
asymmetric information theory to construction project management
and project risk management.
Lampel et al. (1996a, b) discuss information asymmetries and
technological innovation in large engineering construction projects.
Innovation in complex engineering projects is hampered by infor-
mation asymmetries that accompany joint problem solving by
owners and external organizations. This uncertainty creates addi-
tional informational asymmetries between owners and firms
engaged in designing, building, and supplying projects. Besfamille
2003 studies local public works decisions in a hierarchical setting
with two-dimensional asymmetric information. Thevendran and
Mawdesley (2004) describe how those in the construction industry
perceive risk management and, in particular, human risk factors.
They report that human risk factors are, according to the respond-
ents, the most influential construction risk and stress the need to
incorporate human risk factors into project risk management.
The findings of this research form the basis for an extended inves-
tigation that aims to identify and model human risk factors that
influence the procurement of construction projects.
The research of Turner and Müller (2003, 2004); Müller and
Turner (2005) showed that project owners and project management
have a principal-agent relationship. Project performance can be im-
proved significantly if the client and project manager collaborate
well. Sacks and Harel (2006) establish an economic game theory
model for understanding the behavior of subcontractors in allocat-
ing resources to construction projects; the model describes the
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influence of the degree of reliability of the planned schedule on
subcontractors’ and project managers’ behaviors under traditional
unit price contracting.
There is a typical principal-agent relationship between owners
and supervisors, and owners and contractors in a construction
project, and to ensure that the project succeeds the fundamental in-
terests of the participants should coincide. However, when one par-
ticipant acts to maximize his or her own interests, his or her actions
may adversely affect the interests of others. Several effective mea-
sures for reducing project risk have been put forward by researchers.
Bower et al. (2002) explore incentive mechanisms for project suc-
cess. Their research describes the key features of motivation and
incentive contracting, and three real contracts are outlined and com-
pared with particular attention given to the incentive mechanisms
used. They found that incentive arrangements must be aligned with
the needs of the client and contractor, must correctly allocate risk,
and must allow for an appropriate level of client involvement.
The allocation of risk among the contracting parties in construc-
tion contracts must be done rationally and is an important factor in
project success. Lam et al. (2007) present a decision model that
uses fuzzy logic to transform the linguistic principles and experi-
ential expert knowledge into a more usable and systematic quanti-
tative-based analysis. Li et al. (2005) and Medda (2007) explore
risk allocation in public–private partnership (PPP) projects. They
put forward risk allocation principles and establish risk allocation
frameworks for PPP projects. The allocation of risk among the par-
ticipants is closely related to each participant’s attitudes to risk. The
expected utility approach for studying risk behavior suggests that
we should adjust for risk perception and risk attitude to obtain sub-
jective values (Han et al. 2005). Chan and Au (2007, 2008) explain
the relationships between a contractor’s risk perception, risk atti-
tude, and risk behavior by examining the potential change in pat-
terns from perception to attitude and further from attitude to
behavior. It was also suggested that risk-pricing behavior could best
be measured by examining risk perception and attitude together
with other situational variables that affect behavioral expression.
The asymmetric distribution of information in cooperation can have
an effect both before and after a contract is closed. Attention must
therefore be given to information imbalances. Once an awareness
of possible information imbalances has been developed, the flow of
information can be designed to address any problems. Furthermore,
transparency within the project can be increased by the means of a
suitable reporting system (Schieg 2008). Optimal incentive con-
tracts may aid in avoiding moral hazards and asymmetric informa-
tion in projects (Bergmann and Friedl 2008). Juan (2009) proposes
a systematic decision support approach for solving asymmetric in-
formation problems by using case-based reasoning and data envel-
opment analysis.
In recent years, asymmetric information problems have caused
extensive concerns in China. Some researchers have applied asym-
metric information theory to construction projects. Zhang and Guan
(2000) explore the information model of the construction industry
and study asymmetric information problems between clients and
contractors in the tendering and construction phases. Zhang and
Li (2002) discuss asymmetric information problems between
owner and government, owner and contractor, and owner and
supervisor in the construction market. Ren et al. (2004) and Sha
et al. (2004) explore the asymmetric information problem in con-
struction projects from the perspective of information economics.
This research indicates that a principal-agent relationship exists be-
tween the participants in a construction project and that asymmetric
information is the major cause of project risk.
Several researchers have applied principal-agent theory and
game theory in an attempt to solve the asymmetric information
 problem in construction projects. Wang (2004) describes incentive
and constraint mechanisms for the principal-agent relationship in a
construction project. In Yang and Wang (2006), the game between
the participants of a large capital construction project was analyzed
using game theory, and some policy suggestions and measures were
suggested for preventing collusion. Guan (2007) establishes a game
model for the government, designing departments and supervising
companies following game theory methods. Xiang et al. (2007)
apply asymmetric information theory to project risk management
and analyze the behavior of participants in construction projects, in
particular, the bidding and fulfillment between owner and contrac-
tor, owner and supervisor, and contractor and supervisor. Xiang and
Xie (2008) present some countermeasures for resolving informa-
tion asymmetries in project risk management, such as strengthening
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regulations, mechanisms of incentive and constraint, strengthening
sincerity, and early risk warnings.
In light of the preceding literature review, some issues in the re-
search of construction projects using asymmetric information
theory are as follows. First, the relationship between asymmetric
information and project risk should be explored more deeply.
Second, most current economic models assume a noncooperative
game, where people pursue their own interests and do not care about
social goals. However, behavioral economics and experimental eco-
nomics research indicates that people have a social preference for
cooperative games. Third, there is no systemic method or measure
for preventing construction project risk under asymmetric informa-
tion. In view of the importance of understanding construction
project risk under asymmetric information, we attempt to analyze
the issue of asymmetric information in construction projects and
build a formative model for construction project management.
We explore the relationship between asymmetric information and
construction project risk and propose a systematic measure for pre-
venting construction project risk under asymmetric information.
Incomplete Information and Construction Project
Risk
Risk is an uncertain event, which, if it occurs, has an effect (positive
or negative) on one or more project objective (PMI 2004). Risk is
the unity of risk factor, accident, and loss. Of the three components,
risk accidents incur unexpected losses, while risk factors lead to
accidents. People face risks in any economic activity because they
are not able to know all relevant information when making deci-
sions. Moreover, they cannot foresee the future accurately because
of the objective existence of uncertainty. If there is no uncertainty,
future results will not deviate from the target, and there is no risk.
However, risk can be reduced. According to Shannon (1948, 1949),
information is used to eliminate uncertainty that infers that eco-
nomic reality is in a state of incomplete information. Therefore,
if the amount of information increases, uncertainty will be reduced,
and risk will also be reduced. Accordingly, in the extreme cases,
there is no risk when people have complete information, and the
risk is greatest when people have no information. Thus it is clear
that incomplete information is the root cause of risk.
Incomplete information is divided into symmetric information
and asymmetric information according to the information pos-
sessed by the parties involved in a transaction. The risks associated
with symmetric information in construction projects include the in-
terest rate, the exchange rate, and political risk. In general, these
variables cannot be predicted and information about them can
be obtained only by observing the market. For example, under
normal circumstances neither party involved in a transaction can
predict future changes in interest and exchange rates. Therefore
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neither can be in a position of holding an information advantage.
Instead, they must rely on predictions based on public information
and the situation of market demand and supply. Thus the informa-
tion is symmetric. Fluctuation in interest and exchange rates may
increase the risk for one party, but this possibility is fair and favors
neither party. Systematic risk is also present in construction markets
and again is related to symmetry of information. The risk factors
include policy, political events, economic cycles, and natural disas-
ters. Under normal circumstances, these information variables are
known equally by market participants, and therefore participants
face the same level of risk. However, the symmetry of information
is relative while asymmetric information is absolute. For example,
because of the unsound construction market system in China, trad-
ing activities that should be transparent with symmetric information
often involve asymmetric information because some participants
obtain information in advance through illegitimate channels. The
participants who have the additional information can take advan-
tage of it to manipulate the market, conduct insider trading, and
transfer the risk to other parties, who then incur additional losses.
This is the essential difference between the risk associated with in-
formation symmetry and that associated with information asymme-
try. The risk arising from symmetric information is often referred to
as objective risk, while the risk arising from asymmetric informa-
tion is a consequence of decision-making behavior of the market
participants.
From the perspective of information economics, information
asymmetry gives rise to the issues of adverse selection and moral
hazards, which place a premium on opportunistic behavior and
are the root cause of behavior risk. Information asymmetry in con-
struction project management has an effect on the decision-making
behavior of the participants, often decreasing the effectiveness of
decision making. Therefore, information asymmetry is a key factor
behind the problems arising in construction project management,
and to reduce construction project risk it is necessary to avoid in-
formation asymmetry. Hence it is essential to design mechanisms
for effectively managing this risk. That is, the application of asym-
metric information theory to construction project risk management
is absolutely necessary.
The relationships between incomplete information, asymmetric
information, and project risk are shown in Fig. 1.
Issues of Information Asymmetry in Construction
Project Management
All market players are always exposed to asymmetric information,
and because of the distribution of asymmetric information, people
will engage in all kinds of information collection and exchange
activities, information services, and production and consumption
of information. The purpose of information activities is to reduce
information asymmetry, so that all parties are able to obtain infor-
mation that is as complete as possible. Asymmetric information
theory has deeply affected every aspect of the market economy
and changed many important market concepts. It has also had an
important impact on construction project management.
Fig. 1. Information asymmetries and project risk
 Information Model in Construction Project Management
Throughout the duration of a construction project, there are many
participants involved, including the owners, designers, builders,
suppliers, supervisors, and government administrative departments.
The three major participants in the construction market are the own-
ers, the contractors, and the supervisors. The owners, also known as
the development organization or the developer, are the buyers
of the construction project products, whom we will call the prin-
cipal. The contractors, including survey and design units and
construction units, are called the agent and are the seller of the con-
struction project products. The supervisors, including supervision
units and advisory bodies, are commissioned by the owners or on
behalf of the owners to conduct supervision and management or
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advisory services during the project. The relationship between
owners and contractors is principal-agent identified by the con-
struction contract, while the relationship between owners and
supervisors is principal-agent determined by the supervision con-
tract, and that between supervisors and contractors is a relationship
of supervising and being supervised. We can build a general infor-
mation model of construction project management as shown in
Fig. 2(a).
We point out that in China, the government is also a participant
and plays an important role in the construction market. At the
very beginning of the foundation of new China, a planned
economy dominated the whole country. In a planned economy,
the government interferes in almost every economic field. Since
1978, the Chinese government has enacted a series of reforms to
build a market system with great success. Still, there is a lot of
work to be done to ensure a sound market system. During the
transition period, many older laws and regulations are still in
force. The significance of the government in project management
is mainly reflected in guidance, supervision, and control. The
government administration, including construction competent
authorities and the related environmental, municipal, fire, health,
and planning departments, oversees construction project manage-
ment and supervision according to laws and regulations. For
example, local government maps out the function of each field
and identifies certain control indices, such as building height, plot
ratio, building density, and so on, in view of the overall situation.
Each land user must strictly follow the rules and operating
procedures under the supervision of the authority or face punish-
ment of some kind. Based on the theory of modern construction
project management and the relationships between the project
participants, we can build an information model of construction
project management in China as shown in Fig. 2(b).
Fig. 2. Information model of construction project management: (a) general information mode; (b) information model in China
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Analysis of Asymmetric Information Problems in
Construction Project Management
In construction project management activities, information asym-
metry exists among the owners, the contractors, and the supervi-
sors. In this section, we will analyze the problems arising from
this information asymmetry.
First of all, information asymmetry exists between owners and
contractors in the bidding stage of the construction project. The
bidding stage involves mutual responses between owners and con-
tractors and is a two-way selection process. In choosing a contrac-
tor the owners have to consider factors such as qualifications, past
performance, and details of the tender for each bid. However, the
contractors choose which projects to bid for according to their as-
sessment of the owner’s credibility, financial strength, and overall
procedures. Thus the two sides have asymmetric information in this
process of mutual selection. The asymmetry can be summarized as
follows. The owners know more about the requirements of the con-
struction project, but have less information about the contractor’s
ability, quality, technology, equipment, management, and services.
Therefore, the owners are at an information disadvantage, and the
contractors have an information advantage. Conversely, the con-
tractors know more about their own capacity than the owners
but less about the purposes of the construction, the owner’s finan-
cial situation, and the construction project procedures. In this
respect, the contractors are at a disadvantage, whereas the owners
have an information advantage. In these circumstances, the two
sides will try to obtain as much information as possible and con-
stantly propose countermeasures to reach balance and agreement.
That is, the contractors will transfer information about their con-
struction capacity to owners through advertising, quality certifica-
tion, and other means, while the owners will need to investigate,
understand, and evaluate the contractors to make their selection.
Second, information asymmetry also exists between owners and
contractors in the performance stage of the construction project.
After the owners have chosen the contractors and signed a contract,
there is still asymmetric information in the process of contract
performance. The contractors know more about their own behavior
than the owners, such as the quality of personnel, the quality of
materials, the construction methods, and their technology. The
owners cannot fully assess whether the contractors are follow-
ing the contract strictly or whether there are shortcuts being
taken or “lazy” behavior. In this respect, the owners have less in-
formation than the contractors. At the same time, the contractors
cannot be certain about the credibility and financial capacity of
 the owners and may open themselves to losses arising from moral
hazards.
A common phenomenon in business transactions is one party
purposely not disclosing all the known information based on the
fact that the other party may take advantage of evident weaknesses
to increase his or her own profit. Because of the phenomenon
mentioned earlier, both owners and contractors tend to believe that
certain core information is being purposely hidden from them
whether it is or not. This reasoning causes both parties to really
hold back information, which makes transactions less transparent.
Therefore, uncertainty, whether objective or intended, exists on
both sides as a result of asymmetric information in this transaction
process. The owners and contractors cannot completely control the
final outcome of their choices and are confronted with risk arising
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mutual selection. However, the two sides can prevent moral hazards
by establishing incentive and constraint mechanisms. As the goal of
both the owners and the supervisors is to maximize the expected
utility at the minimum cost, the owners can set in place rules that
will encourage the supervisors to maintain a certain standard, while
also preparing constraints that will make the supervisors work hard.
The problems arising from asymmetric information between
owners and supervisors are shown in Table 2.
The relationship between supervisors and contractors involves
supervising and being supervised. In general, the supervisors will
be familiar with the processes in the construction project but may
know little about the contractor’s production capacity, technical
knowledge, management capacity, business reputation, and subjec-
tive effort, and they may also not know much about whether

from the possibility of adverse selection.
The problems of asymmetric information between owners and
contractors are shown in Table 1.
When the owners choose supervisors, they have inferior infor-
mation about the supervisors’ skill level, management quality,
service level, and goodwill, while the supervisors have full infor-
mation regarding their own technological strengths, management,
and service quality. The supervisors face the same problem in that
they do not know much about the owners’ construction intentions,
financial payment capacity, or business reputation, and this puts
them at an information disadvantage.
During the construction process, the supervisors have complete
information because they are completely familiar with the progress
of the project and are clear about the extent of their efforts. This
puts the supervisors at an information advantage, as the owners
cannot directly observe the operations of the supervisors during
the entire process and cannot be fully aware of the extent of the
supervisors’ efforts.
The information asymmetry between owners and supervisors
can result in adverse selection and moral hazards. The owners
and the supervisors must pay to collect relevant information that
will further their understanding of each other in the process of
the contractor’s behavior is consistent with the client’s goals.
Therefore, there is an asymmetric information problem between
the two sides in the supervision process, where the contractor
has information dominance and the supervisor has an information
disadvantage.
Both the supervisor and the contractor face the risk of moral
hazards because of the information asymmetry. Generally speak-
ing, when there is a risk of moral hazards on the supervision side,
it has little effect on the goals of the owner as long as the contractor
shares these objectives and has sufficient capacity to act. When
there is the risk of moral hazards on the contractor’s side, these
may cause issues in spite of the supervision if the contractor takes
actions contrary to the owner’s goals. If there is the risk of moral
hazards on both sides, there is the possibility of rent-seeking behav-
ior that increases the risk to the owner and decreases the probability
of the owner’s objectives being achieved.
In summary, there is the possibility of adverse selection and mo-
ral hazards because of information asymmetry between the two
sides. The information asymmetry between supervisor and contrac-
tor may lead to rent-seeking behavior because of the informa-
tion asymmetry allowing the pursuit of increased self-utility.
The information asymmetry between the participants is at the core

Table 1. Information Asymmetries between Owner and Contractor

Bidding stage
Participant Information dominance
Owner Construction purpose,
financial strength,
construction project
procedures
Contractor Own quality, technology,
equipment, management,
and service
Information inferiority
Contractor’s qualifications,
technology and management
ability, performance,
business reputation
Owner’s construction purpose,
financial payment capacity,
business reputation
Performance stage
Information dominance
Financial payment capacity,
management ability,
business reputation
Employee talent, construction
method and technology,
management ability and
instruments, material quality
Information inferiority
Contractor’s management ability,
employee talent, business
reputation, construction
technology, equipment
Owner’s business reputation,
financial payment capacity

Table 2. Information Asymmetries between Owner and Supervisor

Before signing the contract
Participant Information dominance
Owner Construction standard
and purpose, financial
strength, construction
project procedures
Supervisor Own quality,
technology level,
management ability,
service quality, goodwill
Information inferiority
Supervisor’s skill level,
management ability,
service quality, goodwill
Owner’s construction
standard and purpose,
financial payment capacity,
goodwill
After signing the contract
Information dominance
Financial payment capacity,
management ability, contract
control ability, technology
quality, goodwill
Technical design and
construction criteria, quality
control, site conditions,
construction process, own
service quality, effort degree
Information inferiority
Supervisor’s service
quality, goodwill,
management ability,
effort degree
Owners’ business reputation,
financial payment capacity,
technical quality control,
contract control ability

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 of construction project risk. Therefore, it is necessary to put mea-
sures in place that reduce the information asymmetry among the
participants and prevent moral hazards in construction project
management. Moreover, the participants in the project should be
encouraged to consciously observe the goals of the construction
project, and this should be the focal point of construction project
management.
Some Measures for Construction Project Risk
Management in China on the Basis of Asymmetric
Information Theory
Information asymmetries among participants can give rise to ad-
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verse selection and moral hazards in construction project manage-
ment and are the main cause of construction project risk (Sha et al.
2004). With the progress in science and technology, our ability to
share information is increasing, but in spite of this information
explosion information asymmetries still exist. It is necessary to es-
tablish effective management mechanisms to reduce information
asymmetries among the participants and to enhance the manage-
ment of construction project risk (Campisi et al. 1997).
We can transform risks into opportunities or reduce their neg-
ative effects through elimination, reduction, transfer, and retention.
In addition to traditional risk management strategies, it is best to
build a platform that allows the participants in the construction
market to choose their trading partners in a way that reduces the
transaction costs and risk.
Based on Fig. 2, systematic measures on the macro- and micro-
levels should be taken to solve information asymmetry. As we can
see in the information model, the government influences the other
three parties and so plays an indispensable role in the reform. We
propose measures relating to strengthening regulations, building
mechanisms of incentive and constraint, strengthening sincerity,
and establishing early warning mechanisms.
Strengthening Regulations
Spence (1973) points out that system guarantees are a primary
solution to the problem of information asymmetry. Therefore,
we should pay attention to formulating rules and principles that
reduce the degree of information asymmetry among the participants
and consequently reduce construction project risk. Specifically, we
can address the following aspects:
• Enhance governmental policy guidance. With the maturing
of the modern market and the government’s increasing role
in macrocontrol, the government is becoming an important
participant in the construction industry through its control of
transactions. This macrocontrol is an effective way of guiding
the normal development of construction project management
and of resolving the issues of adverse selection and moral
hazards. This is particularly important in establishing orderly
market competition in the developing Chinese economy. There-
fore, the principles and policies of the state, as well as laws,
regulations, and systems of construction market management
should be improved and implemented, with the aim of project
coordination that avoids overlaps, omissions, and conflicts. At
the same time, government departments should develop the
Chinese market system with laws and regulations that ensure
all construction project activities are included in the legal
system.
• Cultivate and improve intermediary agencies. Increased
third-party supervision should be introduced in the Chinese con-
struction market to reduce information asymmetry. Supervisors
have the advantage of professional access to information
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J. Constr. Eng. Manage. 2012.138:1303-1311.
services and can ensure a project through their own credibility.
Therefore, they are important as regards establishing and im-
proving the mechanisms of self-regulation in the industry. An
equitable and normative trade agency should be cultivated to
establish mechanisms that increase the symmetry of informa-
tion. This trade association should establish “the rules of the
game” and put in place clear operational guidelines for the dis-
closure of information. This will increase the transparency of
information and make the trade agency an information center
and a platform of “equity, fairness and good faith.”
• Establish a high-performance information system. An im-
portant way of improving the information asymmetry situation
is through a comprehensive and accurate information disclosure
reporting system, ideally based on a perfect and reliable com-
puter network. Therefore, government departments must set up
a unified participant information system (PIS) for the construc-
tion project and a risk management information system (RMIS)
for the participants in the construction project. These systems
should be fully accessible to all the participants in a construction
project. This information system should include not only the
participants’ individual qualifications, technical and manage-
ment capacities, equipment, services, and other basic informa-
tion but also their performance history, and business reputation.
In this way the information becomes transparent, open, and
shared. The participants in a construction project can then un-
derstand the others very clearly and determine their risk type
through the PIS and the RMIS, providing a good reference
for decision making. The assembly of the PIS and the RMIS
would be such a large project that many departments would
be involved. First, national authorities, such as the Ministry
of Construction, would be responsible for organizing and estab-
lishing a unified national information system for construction
project management that would improve information sharing
and utilization. Second, authorities at all levels would need
to incorporate construction project participants from all regions
into the statistical range, at the same time ensuring that the in-
formation is correctly integrated and is authentic. Third, the
information system must be updated regularly because the
participants are all in a process of dynamic change, and these
changes must be incorporated to enhance the quality of the in-
formation system.
• Strengthen and improve the information disclosure system.
To prevent adverse selection and moral hazards and to establish
open and fair competition, it is important to minimize the asym-
metry of information and enhance the transparency of credit
information. Since 1844, the information disclosure system
has been explored to make transaction markets more transpar-
ent. For example, some developed countries solve the problem
of information asymmetry in the construction market through
a relatively mature disclosure system. Information disclosure
systems, including joint credit information systems, public cred-
it systems, and credit rating systems, should be strengthened and
improved, and a redlist and blacklist should be established to
support a system of rewards and punishment that will motivate
participants to act in good faith. The first priority is to construct
a public credit record for all the participants in the construction
market and to form a platform for inquiry that will increase
information transparency and symmetry.
Building the Mechanisms of Incentive and Constraint
There are information asymmetries between the participants in con-
struction projects that can give rise to adverse selection and moral
hazards. Therefore, sound incentive and constraint mechanisms
 should be established and improved to ensure the achievement of
project objectives.
According to principal-agent theory, the relationships between
owners and contractors and between owners and supervisors are
essentially contractual relationships. To ensure that the interests
of both sides are balanced both before and after the transaction,
a reasonable contract design is important for avoiding adverse
selection and moral hazards that may result from information
asymmetry. The purpose of the contract is therefore to establish
a mechanism that can stimulate consistency of information. Such
a mechanism must ensure that the agent shares private information
with the client. The client needs to design a contract that will sup-
port their purposes and can be accepted by the agent. Therefore,
no one is able to damage the client’s interests with unobservable
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behavior. The market regulations are important for governing
the conduct of the participants in construction projects and restrict-
ing them to fulfilling their respective commitments. A choice ben-
efiting both sides should be made to avoid adverse selection and
moral hazards. The owners need to design a contract through which
they can achieve their purpose and which both the contractors
and supervisors are willing to accept. The owners prevail on the
contractors to choose their actions through the use of an incentive
contract. This contract should meet the following two constraint
terms. First, the individual rationality constraint, also called the
participant constraint, requires the contractor to carry out specific
tasks. The second is the incentive constraint, which encourages the
contractor to work hard and in accordance with the owner’s wishes.
Strengthening Sincerity
Integrity refers to the reliability, social responsibility, and trustwor-
thiness of a person or unit. In the market economy environment,
corporate and individual commercial credit and the degree of
approval of economic credit are important indices for measuring
the economic circumstances and the degree of development of a
country, region, or economic organization. Therefore, it is impor-
tant to regulate construction market ordering and gradually develop
moral standards throughout the market based on honesty and moral
integrity. The credit system in the construction market is a series of
laws, regulations, and standards that improve the market situation
in terms of asymmetric information and restrict opportunistic
behavior by market participants. This guarantees a reduction in the
overall transaction costs in the construction market. At present,
the Chinese construction market is still relatively chaotic because
the behavior of market participants is not standardized. Therefore,
construction project participants must develop a sense of integrity,
regulate their own behavior, perform according to their contracts,
strengthen mutual communication, and concentrate on reducing
the phenomenon of information asymmetry. At the same time,
the credit system should be enhanced through “promoting by
government, market operation, legal protection, social supervision,
scientific planning, and implement step by step” (Zhang et al.
2004). This can restrict the behavior of construction market partic-
ipants, making it difficult for dishonest participants to survive and
continue to develop. Measures that should be taken in the construc-
tion of the credit system are as follows.
• Clarify the role of government in the credit system. China
has a relatively immature market economy, and the government
should use long-term planning to create a construction market
credit system. As social credibility encompasses a huge social
system, administrative departments should play an important
role in the establishment of the social credit system according
to the principle of the government leading and the market oper-
ating. In the creation of the credit system, the government guides
JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT © ASCE / NOVEMBER 2012 / 1309
J. Constr. Eng. Manage. 2012.138:1303-1311.
and safeguards social credit through laws and regulations that
ensure credit information transparency. Furthermore, the gov-
ernment needs to establish intermediary services and a public
social credit information network, strengthen credit supervision,
and punish discreditable behavior.
• Establish and perfect legal credit system for the construction
market. Systems for credit collection, evaluation, and reward-
ing and punishing behavior should be established according
to the specific features of the industry, along with laws and reg-
ulations that can guide the creation of a credit system for the
entire construction market. It is reasonable to define collection
and publish the scope of credit information. This will ensure the
integrity and reliability of credit information and effectively
protect state secrets, business secrets, and the privacy of citizens.
Moreover, developing punishment mechanisms that target
discreditable behavior in the market will protect the lawful
rights and interests of enterprises and create a satisfactory legal
credit environment.
• Cultivate and improve credit consciousness in the construc-
tion market. There is a need to improve media and publicity
involvement, guide enterprises to strengthen credit management
and prevention awareness, and strengthen the credit understand-
ing of individuals. This applies especially to officials at all levels
of government and managers of enterprises and intermediary
service agencies. Therefore, the ideas of honesty and trust-
worthiness become more prevalent. Specifically, the first step
is to improve understanding of the credit system and develop
“credit first” awareness. The second step is reinforcing public
opinion to form an atmosphere in which “keeping faith is glor-
ious while breaking faith is shameful.” Therefore, people can
truly understand the importance of credit.
• Nurturing and developing credit intermediation services. It
is important to promote and develop intermediary services in the
construction market, including credit information, credit rating,
construction project guarantees, and insurance institutions, by
using the experience of other countries for reference and
consulting those with experience in the Chinese social credit
system. Credit rating is at the core of the credit system, and
the reviews and approval of an enterprise’s quality should be
determined by mechanisms within the economic system. These
mechanisms themselves should also continue to be refined.
Therefore, it is necessary to make an appropriate appraisal
of an enterprise’s credit through independent, objective, and fair
credit analyses, and to create conditions for furthering the
reform of administrative examination and the approval system
based on scientific credit criteria. At the same time, this will
strengthen the management and running of intermediary
services and establish market access and clear policies for inter-
mediary services. This will occur through registration, filing,
supervision, and integration within the intermediary services,
the end result being information sharing and a highly effective
service for market transactions.
Establishing the Mechanism of Construction Project
Risk Early Warning
A critical point for controlling project risk is the establishment
of early warning mechanisms for risk, improving the warnings
of information asymmetry. Early warnings of project risk forecast
the possibility that risk factors will have an effect on the project. An
early warning mechanism requires the design of relevant indices
and empirical parameters based on project risk factors, so that
the target can be compared with observations to determine the
appropriate action according to the degree of risk. Establishing
 early warning mechanisms may allow for rapid identification of
key risk factors, which can serve to enhance control actions and
premanagement.
Conclusions and Future
Asymmetric information theory is widely used in a variety of
disciplines and has become the core of information economics,
arousing widespread concern in academic fields. The phenomenon
of asymmetric information is very common in our economic reality.
The same problem of asymmetric information occurs in construc-
tion project management. From the point of view of information
economics, information asymmetries give rise to opportunistic
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behavior, namely, adverse selection and moral hazards, which
are the primary causes of loss of faith in the construction market
and of construction project risk. The problems arising from
asymmetric information must be resolved to prevent or reduce con-
struction project risk. Appropriate countermeasures for resolving
information asymmetry in project risk management include
strengthening regulations, creating mechanisms of incentive and
constraint, and strengthening sincerity. This research has shown
that incomplete information, especially asymmetric information,
is the essential cause of construction project risk, showing that
asymmetric information theory is helpful for resolving problems
and preventing construction project risk.
The problem of asymmetric information in construction projects
will cause more people to pay attention to in-depth research. The
ongoing research in information asymmetry theory will allow both
the theory to mature and the applications to widen and deepen.
Thus we expect quantitative studies and case studies to appear
on the basis of previous theoretical work and countermeasures
to be more specific and targeted.
Acknowledgments
The work described in this paper was fully supported by a joint
grant from Humanities and Social Sciences Foundation for Youths,
State Education Ministry (10YJC630293), Chongqing Social
Science Foundation Project (2010QNZH26), and Natural Science
Foundation Project of CQ CSTC (CSTC, 2009BB9218). Any opi-
nions, findings, and conclusions or recommendations expressed in
this material are those of the authors.
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