Asset Specificity and Contractors' Opportunistic

Asset Specificity and Contractors’ Opportunistic Behavior: Moderating Roles of Contract and Trust

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Chenxi Shi1; Yongqiang Chen2; Jingya You3; and Hongjiang Yao4 Abstract: In construction projects, contractors often engage in opportunistic behavior. This research aims to examine the effect of asset specificity on contractors’ opportunistic behavior (strong form and weak form), including exploring and comparing the governance effectiveness of contract and trust. The empirical results from a survey of 228 Chinese owners reveal that asset specificity has positive effects on contractors’ strong and weak form opportunistic behavior, and the effect on weak form opportunistic behavior is stronger. The results further show that the impact of asset specificity on opportunistic behavior (strong form and weak form) reduces as contractual complexity increases. The effect of asset specificity on weak form opportunistic behavior decreases as trust strengthens. Accordingly, the findings manifest that effectiveness of contract was more prominent when moderating the relationship between asset specificity and strong form opportunistic behavior. These findings provide a nuanced and advanced understanding of whether complex contracts or high levels of trust are the more effective choices for governing opportunistic behavior and offer managerial suggestions for the parties involved in construction projects. DOI: 10.1061/(ASCE) ME.1943-5479.0000632. © 2018 American Society of Civil Engineers. Author keywords: Asset specificity; Opportunistic behavior; Contractual complexity; Trust; Construction projects.

Introduction Projects in the construction industry are unique with a great deal of variety (Chang and Ive 2007; Costantino et al. 2011; Masten et al. 1991). To perform unique construction projects, owners and contractors invest in transaction-specific assets (Chen et al. 2015; Lui et al. 2009), the value of which will decrease outside the specific project (Anderson and Weitz 1992). Asset specificity varies according to the degree to which the assets are specific to the transaction (Anderson and Weitz 1992; Williamson 1985, 1991). According to transaction cost economics (TCE), contractors may take advantage of these transaction-specific assets and engage in opportunistic behavior pursuing unilateral benefits (Hoetker and Mellewigt 2009; Williamson 1985). Opportunistic behavior, such as withholding information and shirking responsibilities (John 1984), is seen as a severe danger of transaction that has a detrimental impact on project performance and leads to disputes (Lu et al. 2016a). Prior studies have investigated the effect of asset specificity on opportunistic behavior in a number of contexts, such as strategic alliances (Tjemkes and Furrer 2010), procurement relationships (Lui et al. 2009), outsourcing (Bhattacharya et al. 2015), and manufacturing (Yan and Kull 2015; Yen and Hung 2017). However, this effect has received limited 1

Ph.D. Candidate, College of Management and Economics, Tianjin Univ., Tianjin 300072, P.R. China. E-mail: [email protected] 2 Professor, College of Management and Economics, Tianjin Univ., Tianjin 300072, P.R. China. E-mail: [email protected] 3 Postgraduate, College of Management and Economics, Tianjin Univ., Tianjin 300072, P.R. China (corresponding author). E-mail: jingya41@ 163.com 4 Postgraduate, College of Management and Economics, Tianjin Univ., Tianjin 300072, P.R. China. E-mail: [email protected] Note. This manuscript was submitted on September 27, 2017; approved on February 16, 2018; published online on May 7, 2018. Discussion period open until October 7, 2018; separate discussions must be submitted for individual papers. This paper is part of the Journal of Management in Engineering, © ASCE, ISSN 0742-597X. © ASCE

exploration in construction management research. Therefore, it is very important to test the relationship between asset specificity and opportunistic behavior in the construction industry. Because of opportunistic behavior’s serious consequences, there is considerable research devoted to how to curb it. In the construction industry, two main types of governance mechanisms have become important in interorganizational relationships (Fu et al. 2015; Zhang et al. 2016). On the one hand, the parties focus on the role of the formal contract with terms related to the assignment of rights (Anderson and Dekker 2005), enforcement of breaches (Reuer and Ariño 2002), and communication procedures (Argyres and Mayer 2007). On the other hand, trust, which is another governance mechanism, is believed to be a parallel concept with the contract (Arranz and Arroyabe 2012; Ning 2017; Yang et al. 2011). Trust contributes to promoting cooperative behavior (Wu et al. 2017a), reducing ex post transaction costs (Connelly et al. 2015), increasing relationship value (Chen et al. 2017), enhancing satisfaction (Rai et al. 2012), and achieving desired performance (Poppo et al. 2016). Interestingly, this study was conducted in a Chinese context, which is characterized by guanxi, which is a Chinese cultural tradition (Qian et al. 2016). Because guanxi is a crucial predictor of trust (Gong et al. 2013; Wang et al. 2012), does this mean that trust is more important than contract? Because drafting a complex contract requires substantial ex ante transaction costs (Benaroch et al. 2016) and trust is difficult to develop (Das and Teng 2001), it is costly to use a complex contract and develop a high degree of trust simultaneously. Thus, it could be necessary to determine which governance mechanism is more effective in safeguarding transactions against transaction hazards. However, there is still no consistent conclusion. One view regards contract as a more effective governance mechanism than trust to restrain opportunistic behavior (Liu et al. 2009); the opposite view holds that trust works better than a contract (Cavusgil et al. 2004; Lu et al. 2015). One possible reason for the controversial findings may be that previous research exploring opportunistic behavior mainly regarded it as a single-dimensional construct (Bhattacharya et al. 2015; Liu et al. 2009; Tangpong et al. 2010; Zhang and Qian 2017). This study is based on Luo (2006) and classifies opportunistic behavior into

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strong form opportunistic behavior, which breaches contracts, and weak form opportunistic behavior, which violates relational norms not written in contracts. For such different types of opportunistic behavior, contract and trust may play distinct roles. With respect to governance mechanisms, there are two main streams of research. Some scholars have argued that asset specificity influences contractual complexity (Anderson and Dekker 2005; Barthelemy and Quelin 2006; Duplat and Lumineau 2016) and trust (Cao et al. 2018; Lui et al. 2009; Wu et al. 2017a; Yen and Hung 2013). However, these studies made little effort to clearly posit why a certain degree of asset specificity should match the appropriate governance mechanism. According to TCE, asset specificity increases the likelihood of opportunistic behavior, which is a crucial predictor of transaction costs (Williamson 1985). To govern the situation, appropriate governance mechanisms are adopted to minimize transaction costs (Williamson 1985). As a result, it seems unreasonable for prior studies to view contract and trust as the dependent variables of asset specificity because asset specificity does not influence governance mechanisms directly. Meanwhile, the evaluation criteria of governance effectiveness has attracted very limited attention in prior studies. Another stream of research focuses on the impact of contract and trust on opportunistic behavior (Huo et al. 2015; Lu et al. 2016b; Lumineau and Quelin 2012; Yang et al. 2011). However, these papers rarely examined the essential reasons of occurrence of opportunistic behavior. It seems that much of the literature has concentrated on only a part of a bigger issue. Therefore, this paper proposes a more complete model, which incorporates asset specificity, as a transaction characteristic; opportunistic behavior, as a transaction danger; and governance mechanisms to draw out the normative implications, as suggested by Reuer and Ariño (2007). To fill the previously mentioned research gaps, this paper addresses the following research questions: 1. What effects does asset specificity have on each form of contractors’ opportunistic behavior in the construction industry? 2. How do contractual complexity and trust play safeguarding roles in the relationship between asset specificity and each form of contractors’ opportunistic behavior? 3. Which governance mechanism is more effective, contract or trust? Based on observations and theories, this research investigates the effects of asset specificity on contractors’ strong form and weak form opportunistic behavior, and exploring the governance effectiveness of contract and trust by testing their moderating roles in the Chinese construction industry. Moreover, by comparing the effectiveness of contract and trust in different situations, a more appropriate scope of application is elucidated. This study brings the insights of governance mechanisms in the existing literature of construction management in three ways. First, the authors extend the understanding of TCE to the construction industry and enrich it by identifying that asset specificity leads to more weak form opportunistic behavior. Second, a more complete model is taken into account and how different dangers in construction projects should suit appropriate governance mechanisms. Third, a new detailed explanation for the prior controversy is explained by elaborating that contracts work better when governing strong form opportunistic behavior and trust is as effective as a contract on governing the weak form opportunistic behavior. To achieve the aims mentioned previously, this paper first reviews the theoretical background of opportunistic behavior and asset specificity in the construction industry. The next section proposes hypotheses that concern the relationship between asset specificity and opportunistic behavior, as well as the moderating roles of © ASCE

contractual complexity and trust. The following section explains the methodology and presents the results of the empirical analysis. Finally, this paper presents a discussion of the results, theoretical contributions, applications for practitioners, limitations, and suggestions for future research.

Theoretical Background and Hypotheses Asset Specificity According to previous research, asset specificity refers to the extent to which assets are specialized to a specific transaction, the value of which is sacrificed when assets are used for other purposes (Anderson and Weitz 1992; Williamson 1985, 1991). Based on TCE, asset specificity is one of three principal dimensions of transactions (Williamson 1985). TCE suggests that asset specificity determines the type of efficient governance structure, which implies that transactions should be organized through market governance when the level of asset specificity is low or through hierarchy governance when the level of asset specificity is high (Williamson 1996). For the purpose of performing tasks (John and Weitz 1989) and reducing product costs (Williamson 1985), transaction-specific assets, including tangible and intangible assets (Lohtia et al. 1994), are invested. The four types of asset specificity identified by Williamson (1991) are considered in this research, including physical asset, human asset, dedicated, and temporal. Physical asset specificity describes the degree to which physical assets, such as equipment, machinery, or materials, are specific to the transaction (De Vita et al. 2011). For instance, several large mining machineries, invested in a port project, are difficult to use in other projects because of their specific size. Human asset specificity is used to define the extent to which specialized human capital is invested in the transaction through training or learning (Pang et al. 2015). For example, an owner’s personnel accumulates a large amount of knowledge about the contractor, of which value will decline when switching to another contractor. The term dedicated assets means the degree to which assets with general purpose are made for special transactions (Chang and Ive 2007). For example, substantial general-purpose building materials invested in a project cannot be transferred to another project without any costs. Temporal specificity was proposed by Masten et al. (1991) who indicated the importance of time limits and critical processes in construction projects, and they argued that contractors may threaten to suspend construction at the last minute for higher prices or more resources. For example, any delay in the foundation construction will cause indelible losses, such as costs of speeding up the schedule or damages of late operation. Contractors’ Opportunistic Behavior Williamson (1985) defined opportunism, which is a behavior assumption, as “self-interest seeking with guile,” including misleading, distorting, disguising, obfuscating, and so forth. As well as opportunism involving violations of explicit contracts, violations of relational contracts have been added to recent definitions of opportunism, covering both active and passive actions (Wathne and Heide 2000). In construction projects, contractors often engage in opportunistic behavior for their own sake at the expense of owners or other parties (Cheung et al. 2008). Based on prior research, contractors’ opportunistic behavior is self-interest pursuing behavior with deceit at the expense of owners by withholding or distorting information, withdrawing commitments, breaching agreements, exercising private control, or shirking obligations in construction

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projects (Das and Rahman 2010; Lu et al. 2016b; Luo 2006; Luo et al. 2015). Luo (2006) divided opportunistic behavior into strong form and weak form. Strong form opportunistic behavior is a violation of clauses and terms that are explicitly drafted in contracts (Luo 2006), such as failing to construct with the agreed quality procedures or providing material below the specified standard (Pang et al. 2015). Weak form opportunistic behavior is defined as actions that violate relational norms, which are not recorded in contracts but implicated in parties’ common understanding (Luo 2006). For example, a contractor may bid opportunistically for the project by offering a low price and renegotiate for compensation during the execution phase (Chang and Chen 2016), or a contractor tries to amend clauses in a signed contract through renegotiation (Pang et al. 2015). Both strong form and weak form opportunistic behavior increase transaction costs or legal fees (Lumineau and Quelin 2012), escalate conflicts, aggrandize difficulties of coordination (Luo 2007), and even lead to unplanned termination of relationships (Das and Rahman 2010). Effects of Asset Specificity on Opportunistic Behavior “Lock-in” effects occur when owners invest in transaction-specific assets, the value of which will decline when they are used for additional purposes (Williamson 1985). Therefore, it will be more difficult to transfer assets outside the transaction without penalty (Brahm and Tarzijan 2016; Chang and Chen 2016). Under these circumstances, contractors will have opportunities to take unfair advantage of these assets to pursue opportunistic gains, such as extra payment and extension of time; thus, owners become vulnerable to contractors’ strong form or weak form opportunistic behavior (Wang et al. 2013). When losses resulting from opportunistic behavior are less than sacrificed value due to premature termination, the party may tolerate and accept the partner’s opportunistic behavior to avoid a greater loss (Chang and Qian 2015; John and Weitz 1989), which stimulates contractors’ larger appetites. Therefore, when the degree of asset specificity is high, contractors are more willing to ignore their contractual obligations and fail to observe the contracts, as well as to make use of contract loopholes to seek selfinterest. Some previous research has argued that asset specificity signals commitment, and the parties will cooperate under the shadow of the future (Lui et al. 2009; Wang 2002) without much opportunistic behavior (Yen and Hung 2017). However, Wang et al. (2013) suggested that it is the expropriation effect, which occurs when transaction-specific assets are used for unilateral benefits, that dominates instead of the bonding effect, which occurs when assets increase considerable value for the transaction. Thus, based on the logic in TCE (Williamson 1985), this research proposes the following: • Hypothesis 1a: Asset specificity is positively associated with contractors’ strong form opportunistic behavior. • Hypothesis 1b: Asset specificity is positively associated with contractors’ weak form opportunistic behavior. To compare the effects mentioned in H1a and H1b, two major reasons are presented. First, compared with weak form opportunistic behavior, contractors’ strong form opportunistic behavior is more detectable by owners (Luo 2006), which decreases the tendency for contractors to violate contracts. Second, strong form opportunistic behavior is punishable based on the explicit terms or clauses of contracts, whereas there are no rules to follow to remedy losses caused by weak form opportunistic behavior (Luo 2006). If owners take some measures to penalize contractors for weak form opportunistic behavior without enough evidence, then it may lead to conflicts and even bring an end to transactions, causing greater loss © ASCE

of assets. Furthermore, if owners attempt to deal with the behavior properly, they must detect behavior, collect evidence, estimate losses, negotiate, and bargain with contractors and implement solutions, which will incur substantial ex post transaction costs (Luo 2006; Williamson 1985). Comparing transaction costs with actual losses, owners will tend to endure their partners’ weak form opportunistic behavior and learn a lesson, unless there are extremely severe outcomes (Luo et al. 2015). Consequently, to avoid detection and predictable punishments for breach of contracts, contractors will be more likely to violate relational norms when owners provide transaction-specific assets. For example, contractors prefer to hide information not mentioned in a contract rather than infringe a contract. This suggests the following: • Hypothesis 2: Asset specificity has a stronger positive effect on contractors’ weak form opportunistic behavior than on strong form opportunistic behavior. Prior literature has identified and investigated many governance mechanisms that can help one party to safeguard transactionspecific assets (Anderson and Dekker 2005; Yang et al. 2012; Yen and Hung 2013). In the following, two types of governance mechanisms contract and trust, are introduced. How they play effective safeguarding roles when asset specificity incurs opportunistic behavior are explored. In addition, the governance effectiveness of contract and trust are compared. Moderating Role of Contractual Complexity A contract, as a formal governance mechanism, regulates each party’s responsibilities, rights, enforcement of intellectual property and severe breaches, coordination between the parties, and procedures for unexpected events (Luo 2002c; Reuer and Ariño 2007; Schepker et al. 2014). In line with the logic of TCE, contracts are crafted to govern the interorganizational transactions with transaction-specific assets (Poppo and Zenger 2002; Williamson 1985). Clauses in contracts are designed to lessen the possibility of misunderstanding and structure the means of efficient collaboration (Salbu 1997), which are also associated with future contingencies (Luo 2005). However, contracts may be incomplete (Grossman and Hart 1986) and costly to draft (Anderson and Dekker 2005; Poppo and Zenger 2002). Owners and contractors still attempt to make contracts more complex to protect their rights and restrain the other party’s behavior because the two parties are likely to seek different goals (Osipova 2015) and wish to maximize their own benefits. This research uses contractual complexity to measure the extent of elaborate clauses included in a construction project contract (Barthelemy and Quelin 2006). For example, the Conditions of contract for construction (FIDIC 1999a) drafted by the International Federation of Consulting Engineers (FIDIC) is more complex than the Short form of contract (FIDIC 1999b) because the former details how owner and contractor communicate with each other and how to adapt to environmental change. The impact of asset specificity on contractors’ strong form opportunistic behavior depends on contractual complexity for four reasons. First, a complex contract provides a standard of behavior for contractors in interorganizational transactions by carefully delineating each party’s rights and responsibilities, which explains what contractors can do and what they should do (Luo 2002c). Second, because contracts stipulate penalties for breach of contract (Ryall and Sampson 2009), such as delay damages for failing to comply with completion schedules and remedying of defective work, contractors involved with transaction-specific assets invested in by owners have suppressed motivation for strong form opportunistic behavior. Third, when contractual complexity is relatively high, contractors should report regularly and receive monitoring

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from owners (Reuer and Ariño 2002). In this situation, even if contractors intend to make profits from transaction-specific assets, their opportunistic behavior is more discoverable by owners. Finally, contractors usually follow the agreements and provide performance guarantees to owners in construction projects. If contractors take advantage of transaction-specific assets and fail to perform according to contracts, owners will have reasons to expropriate the performance guarantees. Consequently, the effect of asset specificity on contractors’ strong form opportunistic behavior decreases as the level of contractual complexity increases as suggested in the following: • Hypothesis 3a: Contractual complexity negatively moderates the relationship between asset specificity and contractors’ strong form opportunistic behavior. Contractual complexity is also expected to reduce the effect of asset specificity on contractors’ weak form opportunistic behavior in construction projects. As the degree of asset specificity increases, contractors are more likely to violate contracts directly as well as to make use of contract loopholes and violate understood relational norms, which are not specified in contracts (Luo et al. 2015). When contractual complexity is relatively high, there are fewer loopholes for contractors to exploit, and asset specificity will cause less weak form opportunistic behavior. Meanwhile, contracts stipulate communication provisions, such as how the parties communicate and share information to avoid coordination failures and misunderstanding (Mayer and Argyres 2004). Parties will exchange information and promote common understandings and expectations of projects (Lumineau and Quelin 2012), which declines information asymmetry and attenuates the way to connect asset specificity with weak form opportunistic behavior (Wathne and Heide 2000). This suggests the following: • Hypothesis 3b: Contractual complexity negatively moderates the relationship between asset specificity and contractors’ weak form opportunistic behavior.

term benefits. In parallel, trust is a crucial predictor of the willingness to continue the relationship (Malhotra and Lumineau 2011); therefore, contractors will not exploit assets and engage in strong form opportunistic behavior for the sake of the shadow of the future. This suggests the following: • Hypothesis 4a: Trust negatively moderates the relationship between asset specificity and contractors’ strong form opportunistic behavior. As the degree of trust increases, the two parties are more likely to exchange ideas frequently and openly, and they will disclose more accurate information, resulting in less information asymmetry (Manu et al. 2015; Zand 1972). Meanwhile, contractors also have faith in the owners’ ability related to investment, payment, and risk (Zhang et al. 2016). In the long run, when owners invest in transaction-specific assets, contractors prefer to maintain common understanding and expectations rather than behave opportunistically in weak form, even if there are contract loopholes. LangfieldSmith (2008) argued that a minimum degree of trust is essential for all interorganizational relationships for safeguarding against selfserving behavior. However, when the degree of trust is relatively low, the parties are more likely to rouse suspicion (Deutsch 1958), which implies that one party believes the other party is earning unilateral profits (Lumineau 2017); thus, they are also motivated to engage in opportunistic behavior. Additionally, relatively low levels of trust may make contractors worry about owners’ ability to invest and pay, leading them to take advantage of transaction-specific assets to pursue short-term benefits. Consequently, the positive effect of asset specificity on contractors’ weak form opportunistic behavior will decrease as trust strengthens. This suggests the following: • Hypothesis 4b: Trust negatively moderates the relationship between asset specificity and contractors’ weak form opportunistic behavior.

Moderating Role of Trust

Comparisons of Moderating Effects between Contractual Complexity and Trust

Trust, another typical governance mechanism, is used to safeguard interorganizational relationships (Cao and Lumineau 2015; Yang et al. 2011). Previous research has suggested that trust is a critical element of cooperative relationships (Ring and van de Ven 1992) and a highly important factor that determines the performance and success of relationships (Jiang et al. 2016; Wong and Cheung 2005). Trust is also a significant component of social capital (Fountain 1998), which can weaken exchange hazards (Jiang et al. 2013) and conflicts (Wu et al. 2017b). In accordance with the definition of trust proposed by Morgan and Hunt (1994), this research defines trust as the extent of one party’s confidence in a partner’s integrity and reliability, which means one party believes that the partner has qualities, such as honesty, a sense of responsibility, benevolence, and competence. With high levels of trust between owners and contractors, they will be more willing to depend on each other (Luo 2002a). In construction projects, it is necessary to develop mutual trust because of the high degree of uncertainty and risk (Zhang et al. 2016). Under most circumstances, owners are inclined to award contracts to contractors with whom they have previously worked because repeat transactions nurture trust (Gulati 1995). Trust in interorganizational relationships implies that one party believes two things about the other party: first, the other party has the capacity to perform the project tasks, and second, the other party has integrity and the intention to cooperate (Das and Teng 2001). With high levels of trust in transactions, the increase of asset specificity might be seen as an expansion of the “pie” (Jap 1999) and contractors may be encouraged to abide by contracts and pursue long-

A contract, as a legally binding and an institutional framework with formal and strict obligations and penalties (Luo 2002b), will give contractors intense deterrent value. A contract is also a type of thirdparty enforcement governance, which implies that a third-party enforcer is employed to settle disputes (Dyer and Singh 1998) and guarantee operability and enforcement of the contract. However, trust depends on self-enforcement (Dyer and Singh 1998) and there is no third party to decide whether and how to enforce it. Thus, once contractors engage in strong form opportunistic behavior arising from asset specificity, such as cheating in accounting information or evading obligations (Luo 2006), owners could discover and respond to the behavior rapidly and effectively according to complex contracts, whereas they can hardly detect and penalize based on trust between the two parties. This suggests the following: • Hypothesis 5: Compared with trust, the moderating effect of contractual complexity on the relationship between asset specificity and contractors’ strong form opportunistic behavior is stronger. If contractors have the capability to use transaction-specific assets and engage in weak form opportunistic behavior, which violates relational norms, trust will suppress their motivation through improving the development of a cooperative relationship in the long run. Furthermore, trust could guide contractors’ behavior under the assumption that partners will not exploit the other party’s vulnerability (McEvily et al. 2003). However, it is difficult for owners to observe and define contractors’ weak form opportunistic behavior because contracts offer few effective remedies or treatment measures (Liu et al. 2014). For these reasons, trust is better suited to

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governing weak form opportunistic behavior resulting from asset specificity. This suggests the following: • Hypothesis 6: Compared with contractual complexity, the moderating effect of trust on the relationship between asset specificity and contractors’ weak form opportunistic behavior is stronger. The overall framework of this research is presented in Fig. 1.

Methods

2003). Harmon’s one-factor test was used to test for common method bias (Podsakoff et al. 2003). The confirmatory factor analysis (CFA) fit statistics of a one-factor model [ x 2/df = 9.768, goodness of fit index (GFI) = 0.595, RMS error of approximation (RMSEA) = 0.197, comparative fit index (CFI) = 0.529, normed fit index (NFI) = 0.505, and Tucker-Lewis index (TLI) = 0.466] does not support the common factor hypothesis, indicating that common method bias is not a significant problem in our research. Measurement


Sample and Data Collection This research consisted of two sequential stages. First, interviews and a presurvey were performed to explore the role of contracts and trust in the relationship between owners and contractors. Second, a large-scale questionnaire survey was applied to obtain data from Chinese project professionals in the construction industry. Semistructured, in-depth interviews with 16 project managers and contract managers who specialized in construction contract management were conducted. Each interview lasted between 40 and 100 minutes. In addition, a pilot test was conducted in a project training program and 79 completed questionnaires were gathered. These interviews and the preliminary research confirmed the practical importance of contracts and trust and helped the authors to refine the constructs and confirm the face validity of the measurements. The questionnaire was sent to a number of professionals who majored in and engaged in construction management. In addition, a “snowball” approach was adopted to extend the reach of the questionnaire. To ensure reliability and completeness of data, the respondents were asked to recall a completed or nearly completed contract that they participated in and to fill out an electronic questionnaire; 349 participants responded to the questionnaires and 286 questionnaires were collected from project owners (the party issuing the contract, including owners and general contractors as the owners of subcontractors). After deleting records in which respondents answered in less than 200 s and deleting unmatched data, 228 valid questionnaires were selected as the sample, representing an effective response rate of 65.3%. Table 1 shows the descriptive statistics for the sample. Among the samples, the respondents with over 3 years’ work experience accounted for 86.8% and the majority of respondents were contract managers or project/department managers, which indicates that the respondents have an intimate knowledge of construction management and are able to make accurate judgments. Regarding project type, the respondents participated in a variety of projects, such as housing (20.2%), energy (18.0%), road and bridge (17.5%), and port and waterway (15.3%). Several approaches were taken to reduce the common method variance. The respondents were informed that their answers were anonymous and that there were no correct answers (Podsakoff et al.

The questionnaire was developed on the basis of the reviewed literature and previous research. To ensure conceptual equivalence, the survey items were translated into Chinese by an independent construction management professor, and then translated back into English (Poppo et al. 2016). To match the context of the construction industry, in-depth interviews with 16 project managers or contract managers were conducted to further refine the items. Also, a pilot study was undertaken and the survey instrument was also revised according to the feedback and suggestions from respondents. A seven-point Likert scale ranging from 1 (strongly disagree) to 7 (strongly agree) was used to measure the main variables. Table 2 lists the survey items. Opportunistic Behavior Luo (2006) differentiated two types of opportunistic behavior: strong form and weak form. Strong form opportunistic behavior was measured using three items adapted from Luo et al. (2015) that Table 1. Demographic Characteristics of the Sample Demographic variable Work experience

Professional qualifications

Project type

•

Contractual Complexity

•

Trust

Value 11 years Project/department manager Contract manager Staff from headquarters Others Housing Road and bridge Port and waterway Energy Municipal engineering Telecommunication Industrial projects Others

Number Percentage 30 59 51 40 48 57 96 45 30 46 40 35 41 17 5 29 15

13.2 25.9 22.4 17.5 21.0 25.0 42.1 19.7 13.2 20.2 17.5 15.3 18.0 7.5 2.2 12.7 6.6

H3~H6

Asset Specificity

•

Strong Form Opportunistic Behavior

•

Weak Form Opportunistic Behavior

H1~H2

Fig. 1. Theoretical framework

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Table 2. Measures Reliability and Validity Assessment


Construct and measuring items

SFL

Asset specificity (a = 0.791; CR = 0.793; AVE = 0.491) 1. If we had to switch to a different contractor during the project, much of our investment in resources (such as human, equipment, or materials) would have to be made again 2. If we had to switch to a competitive contractor during the project, it would be difficult for us to recoup investments in resources (like human, equipment, or materials) 3. If we had to switch to a different contractor during the project, it would take some time for us to bring the new contractor up to adapt to the construction schedule 4. We have spent a lot of time and effort learning to work effectively with the contractor before our relationship was productive Strong form opportunistic behavior (a = 0.864; CR = 0.865; AVE = 0.682) 1. Our partner fails to invest in resources (like human, equipment, or materials) as required by our contract 2. Our partner tries to increase their own gains by evading contractual obligations 3. Our partner sometimes violates contractual terms and conditions for their own sake Weak form opportunistic behavior (a = 0.900; CR = 0.900; AVE = 0.643) 1. Our partner sometimes takes advantage of holes in the contract to further their own interests 2. Our partner has interpreted terms of the contract in their favor at our expense 3. Our partner sometimes makes oral promises without actually doing them later for their own sake 4. Our partner sometimes alters the facts slightly to get what they need 5. Our partner withholds from expending full effort in our cooperative relationship Contract complexity (a = 0.886; CR = 0.897; AVE = 0.745) 1. The contract is very clear and detailed in general 2. The contract specifies many issues 3. The contract contains detailed agreements about managing the cooperation Trust (a = 0.883; CR = 0.893; AVE = 0.740) 1. The parties have a high level of mutual trust during the project 2. The parties think that each party keeps the promises it makes to the other party during the project 3. The parties believe that each party is concerned about the other party’s welfare when making important decisions during the project

0.728 0.744 0.696 0.628 0.752 0.850 0.870 0.811 0.766 0.821 0.815 0.795 0.902 0.935 0.740 0.933 0.929 0.697

Note: SFL = standardized factor loading; a = Cronbach’s alpha; CR = composite reliability; AVE = average variance extracted.

considered the frequency of contractors violating contractual norms. The five items for weak form opportunistic behavior were borrowed from Cavusgil et al. (2004), Heide et al. (2007), Luo et al. (2015), and Parkhe (1993). They measure the frequency of contractor’s violating relational norms and were modified in wording to fit the context. The respondents were asked to score according to their partners’ behavior during the project. Asset Specificity To measure asset specificity, a four-item scale from Anderson and Weitz (1992) and Carson et al. (2006) was adopted and modified to suit the context. The items capture owners’ transaction-specific assets in humans, equipment, materials, time and efforts. Contractual Complexity Consistent with Barthelemy and Quelin (2006), contractual complexity reflects the extent of elaborate clauses included in the contract. Two items, “the contract specifies many issues” and “the contract contains detailed agreements about managing the cooperation,” were developed by Ding et al. (2013) to reflect the scope of the contract. The item “the contract is very clear and detailed in general” was added based on Lui (2009) to assess contractual complexity as a whole. Trust Trust in the research takes the form of the degree of perceived trust between the owner and his partner during the project. Three items adapted from Kumar et al. (1995) and Zaheer and Venkatraman (1995) are adopted in this paper. Control Variables Previous cooperation, expectations of continuity, project contract price, and the partner’s asset specificity were measured to control © ASCE

their possible relationships with opportunistic behavior. First, previous cooperation was tested because of its negative relationship to the perception of opportunistic behavior (Parkhe 1993). It was measured by the number of times the owner and the contractor had cooperated before contracting for this project (Zollo et al. 2002). Second, considering opportunities for future cooperation with the owners, the contractors may not behave opportunistically. Therefore, expectation of continuity was tested with one item reflecting the extent to which the parties expected to have further cooperation in the future (Heide and John 1990). Third, project contract price was tested because it is a proxy of project size that may determine asset specificity. Finally, prior research has argued that the level of investments made by the partner is positively associated with its commitment to the transaction (Anderson and Weitz 1992), which means the partner would maintain a cooperative relationship and not engage in opportunistic behavior. Therefore, it is important to test the partner’s asset specificity in this research. In accordance with Anderson and Weitz (1992) and Chen et al. (2015), the partner’s asset specificity was measured with one item: “the contractor had made comprehensive investments in equipment or materials to meet the technical standards of the project.” Construct Reliability and Validity The measurement model was assessed in terms of reliability and validity. The reliability coefficient (Cronbach’s a) was computed for all constructs on SPSS 20.0. As presented in Table 2, each coefficient is greater than 0.7, exceeding acceptable standards of reliability. The CFA was conducted to test the construct validity of an 18item measurement model (including all reflective latent variables), using the structural equation modeling software AMOS 22.0. The results ( x 2/df = 1.719, GFI = 0.910, RMSEA = 0.056, CFI = 0.964,

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NFI = 0.919, and TLI = 0.956) reveal a satisfactory fit of the data to the model. Composite reliability (CR) and average variance extracted (AVE) were used to assess the convergent validity. The results are shown in Table 2. All CR values for multiple reflective indictors are more than 0.7 (ranging from 0.793 to 0.900), and all values of AVE of these constructs are more than 0.5 (except for asset specificity, which is close to 0.5), suggesting acceptable convergent validity. All the standardized factor loading (SFL) values are more than 0.6, which demonstrated adequate convergent validity. To assess the discriminant validity, the authors compared the square root of AVE values for each construct with the off-diagonal correlation coefficients. As shown in Table 3, all the square roots of AVE values are higher than the off-diagonal correlation coefficients, indicating good discriminant validity of the measurements.

Analysis and Results Hierarchical regression analyses were applied with the help of SPSS 20.0 to test the effects of asset specificity on contractors’ opportunistic behavior and the moderating effects of contract complexity and trust. To examine the moderating effects, procedures proposed by Aiken and West (1991) were adopted. Asset specificity, contractual complexity, and trust were mean-centered to lower multicollinearity and then interaction terms (asset specificity contract complexity and asset specificity trust) were constructed. The variance inflation factors (VIFs) for each variable ranged from 1.014 to 1.489, which indicated that multicollinearity was not an issue. Four control variables were entered as the first block in Models 1 and 5. An independent variable, asset specificity, was entered as the second block in Models 2 and 6. Results in Models 2 and 6 show that asset specificity has effects on both strong form and weak form opportunistic behavior, which is a precondition of the moderating effects. Then moderating variables, contractual complexity, and trust were added as the third block to Models 3 and 7. Models 4 and 8 test the moderating effects by adding both interaction terms (asset specificity contract complexity and asset specificity trust) simultaneously as the fourth block. The regression results are reported in Table 4. As shown by Model 1, the expectations of continuity are negatively related to the strong form opportunistic behavior ( b = −0.230, p < 0.01), indicating that contractors tend to abide by the contracts when the parties expect to cooperate in the future. The results show that the project contract price has a significant positive effect on contractors’ strong form opportunistic behavior ( b = 0.273, p < 0.01) and weak form opportunistic behavior ( b = 0.279, p < 0.01). A larger contract price may leave contractors more space to behave opportunistically because of larger benefits. H1a and H1b, which are about the effects of the asset specificity on two forms of opportunistic behavior, were tested in Models 2

and 6. As presented in Model 2, asset specificity relates positively to strong form opportunistic behavior ( b = 0.207, p < 0.01), which supports H1a. In Model 6, asset specificity relates positively to weak form opportunistic behavior ( b = 0.248, p < 0.01), in line with the prediction of H1b. According to Hitt et al. (2004), the difference between the effects of asset specificity on two forms of opportunistic behavior was examined. Coefficients were compared across two models, and results show that the relevant z-statistic is negative and statistically significant (z = −2.295, p < 0.05), which suggests that asset specificity has a stronger effect on contractors’ weak form opportunistic behavior than strong form opportunistic behavior; H2 was supported. H3a, H3b, H4a, and H4b proposed that the moderating effects of contract complexity and trust weaken the positive influences of asset specificity on contractors’ opportunistic behavior. As Model 4 shows, the interaction of asset specificity and contract complexity has a significant positive effect on strong form opportunistic behavior ( b = −0.141, p < 0.05), which provides support for H3a. However, the interaction term of asset specificity with trust was not significant ( b = −0.106, p > 0.10), which rejected H4a. Model 8 shows the moderating effects of contract complexity and trust on the relationship of asset specificity with weak form opportunistic behavior. The interaction of asset specificity and contract complexity is significant for weak form opportunistic behavior ( b = −0.155, p < 0.05), in support of H3b. Consistent with H4b, the interaction of asset specificity and trust has a negative influence on weak form opportunistic behavior ( b = −0.129, p < 0.05). To illustrate the nature of the interactions, the authors plot the interaction results in Fig. 2 to illustrate the significant moderating effects in H3a, H3b, and H4b. The coefficients of two interaction terms presented in Model 4 were compared and the relevant z-statistic is negative and statistically significant at the 90% level (z = −1.798, p < 0.1), indicating that the moderating effect of contract complexity on the relationship between asset specificity and contractors’ strong form opportunistic behavior is stronger than trust. H5 was supported. However, the relevant z-statistic of two interaction terms coefficients in Model 8 is not significant (z = −1.405, p > 0.10), which rejected H6.

Discussion and Conclusions Discussion The results supported H1a and H1b, reinforcing the fact that asset specificity is positively related to contractors’ opportunistic behavior, regardless of the form. This finding is consistent with TCE logic that asset specificity facilitates the possibility of opportunism (Williamson 1985). Owners invest in transaction-specific assets, which results in “hold up” problems by contractors (Bhattacharya

Table 3. Descriptive Statistics and Pearson Correlation Matrix Variables

Mean

SD

1

2

3

4

5

Asset specificity Strong form opportunistic behavior Weak form opportunistic behavior Contract complexity Trust

4.760 3.756 3.979 5.402 4.608

1.260 1.323 1.298 1.036 1.140

0.701 0.246a 0.276a 0.184a −0.021

— 0.826 0.788a −0.084 −0.396a

— — 0.802 −0.072 −0.406a

— — — 0.863 0.282a

— — — — 0.860

Note: SD = standard deviation; bold numbers in the diagonal row are square roots of AVE. p ≤ .01.

a

© ASCE

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Table 4. Standardized Coefficient Estimates of Regressions Weak form opportunistic behavior

Variables

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

Model 7

Model 8

Previous cooperation Expectations of continuity Project contract price Partner’s asset specificity AS CC TR AS CC AS TR R2 Adjusted R2 DR2 F

0.039 −0.230a 0.273a 0.008 — — — — — 0.115 0.099 — 7.240a

0.065 −0.228a 0.234a −0.027 0.207a — — — — 0.154 0.135 0.039a 8.084a

0.093 −0.151b 0.197a 0.082 0.200a −0.046 −0.363a — — 0.275 0.252 0.121a 11.906a

0.080 −0.095 0.181a 0.075 0.198a −0.105 −0.393a −0.141b −0.106 0.314 0.285 0.039a 11.062a

0.022 −0.119c 0.279a −0.044 — — — — — 0.087 0.071 — 5.341a

0.054 −0.116c 0.233a −0.086 0.248a — — — — 0.144 0.124 0.056a 7.448a

0.083 −0.034 0.194a 0.029 0.241a −0.046 −0.384a — — 0.278 0.255 0.134a 12.100a

0.068 0.030 0.175a 0.021 0.238a −0.114c −0.418a −0.155b −0.129b 0.330 0.302 0.052a 11.915a

High

High

Strong form opportunistic behavior

Weak form opportunistic behavior

Note: AS = asset specificity; CC = contract complexity; TR = trust. a p ≤ 0.01. b p ≤ 0.05. c p ≤ 0.1.

Low

Low Low

Asset specificity

High

Low

Asset specificity

High

Low contractual complexity

Low contractual complexity

High contractual complexity

High contractual complexity

High

Weak form opportunistic behavior


Strong form opportunistic behavior

Low Low

Asset specificity

High

Low trust High trust

Fig. 2. Graphical representation of moderation effects

et al. 2015). Perceived unilateral profits from contractors’ opportunistic behavior that exceed long-term benefits from transactionspecific assets stimulate opportunistic behavior (De Vita et al. 2011). Consistent with H2, the results suggest that asset specificity incentivizes more weak form than strong form opportunistic © ASCE

behavior. Luo (2006) argued that strong form opportunistic behavior is observable and punishable according to terms and clauses of contracts, whereas weak form behavior is difficult to detect and remedy. Thus, weak form opportunistic behavior is preferred by contractors when there are transaction-specific assets to be exploited for private gains.

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The test of H3a and H3b examined the moderating role of contractual complexity on the relationship between asset specificity and opportunistic behavior (in both strong and weak forms). Both hypotheses were supported. Consistent with prior studies (Lui et al. 2009; Lumineau and Quelin 2012), complex contracts play a safeguarding role in mitigating contractors’ opportunistic behavior induced by asset specificity. Regarding strong form opportunistic behavior, complex contracts provide owners with rights and processes to monitor and control contractors’ actions (Kashyap and Murtha 2017). When penalties are encompassed in complex contracts, even though owners invest in substantial transaction-specific assets, contractors’ opportunistic behavior is relatively restrained (Stump and Heide 1996). Regarding weak form opportunistic behavior, contracts create an environment with frequent communication and information sharing (Schepker et al. 2014) and synchronize the parties’ goals (Gong et al. 2007); therefore, the positive effect of asset specificity on violation of relational norms declines. As hypothesized in H4b, trust has a negative moderating effect on the relationship between asset specificity and contractors’ weak form opportunistic behavior. However, H4a was not supported. The results provide no evidence that trust can weaken the effect of asset specificity on strong form opportunistic behavior. Cavusgil et al. (2004) found that trust is negatively associated with opportunistic behavior. However, this research indicates that trust can only mitigate weak form opportunistic behavior caused by asset specificity. One possible explanation could be that construction projects are often undertaken in conditions of high environmental uncertainty (Zhang et al. 2016). Krishnan et al. (2016) argued that trust fails to play an effective role and provide any response to environmental changes. Contractors will give priority to their own interests and engage in strong form opportunistic behavior because they have little time to exploit contract loopholes in such emergencies. The empirical results support H5, which states that contractual complexity, not trust, is more effective in negatively moderating the relationship between asset specificity and contractors’ strong form opportunistic behavior. Previous research suggests that contracts can restrict the link of asset specificity with strong form opportunistic behavior by means of responding to contractors’ violation of contracts (Antia and Frazier 2001) and imposing effective punishments (Qian et al. 2016). The complex contract plays a direct, immediate, and intense role in governing interorganizational transactions, whereas trust plays a mild role. Thus, the complex contract is more effective in reducing contractors’ strong form opportunistic behavior caused by asset specificity. Contrary to conventional wisdom and H6, the results indicate that there is no significant difference between the moderating effects of contractual complexity and trust in the relationship between asset specificity and contractors’ weak form opportunistic behavior. Previous research suggested that trust can establish commitment (Morgan and Hunt 1994) and promote cooperation (Lui and Ngo 2004), whereas contracts safeguard transactions against the risk of weak form opportunistic behavior by avoiding rigidity, boosting flexibility, and promoting commitment (Lu et al. 2016b). Both complex contracts and high levels of trust have mild effects on weak form opportunistic behavior, which is difficult to discover and remedy. Therefore, no remarkable difference of moderating effects was found between contractual complexity and trust. Conclusions and Implications This study investigated the effect of owners’ asset specificity on contractors’ opportunistic behavior, as well as the moderating roles of contractual complexity and trust. Using a sample of 228 owner-contractor relationships in China, this study explored the © ASCE

independent influence of asset specificity on strong form and weak form opportunistic behavior. The results reveal that asset specificity increases the likelihood of the two forms of opportunistic behavior and that it has a stronger effect on weak form than on strong form opportunistic behavior. This study also examined the moderating roles of two types of governance mechanisms. The results suggest that contractual complexity negatively moderates the effects of asset specificity on the two forms of opportunistic behavior, whereas trust only negatively moderates the influence of asset specificity on weak form opportunistic behavior. Finally, comparisons of the moderating effects show that a complex contract is the more effective governance mechanism of reducing strong form opportunistic behavior arising from asset specificity, and there is no evidence that trust plays a more effective role in restraining weak form opportunistic behavior. This paper makes significant contributions to the understanding of TCE and governance mechanisms in the construction industry in several ways. First, it extends TCE to analyze the impact of asset specificity on contractors’ opportunistic behavior in construction projects. Based on TCE, when owners invest in transaction-specific assets, the contractor will have opportunities to act opportunistically (Williamson 1985). This research also enriches the core proposition of TCE by showing that contractors who are motivated by transaction-specific assets prefer weak form opportunistic behavior, which is less detectable and punishable, rather than strong form opportunistic behavior. This paper also proposes a more rigorous and scientific analysis for understanding how to choose an appropriate governance mechanism when asset specificity leads to different opportunistic behavior in construction projects. Prior research has been limited to only one part of it (Anderson and Dekker 2005; Cavusgil et al. 2004; Duplat and Lumineau 2016; Lu et al. 2016a). Two forms of opportunistic behavior, as exchange dangers, are used to evaluate the effectiveness of governance mechanisms. The results confirm that contract and trust can be used to govern the relationship against opportunistic behavior arising from asset specificity, and normative implications are reflected. Through this study, the effective governance mechanism for dealing with different dimensions of opportunistic behavior are uncovered, which contributes to enrich the literature in both governance mechanisms and construction management. Regarding the more effective governance mechanism, prior studies provided inconsistent evidence (Cavusgil et al. 2004; Liu et al. 2009; Lu et al. 2015). This research fills the gap by dividing opportunistic behavior into strong form and weak form and attempting to assess the relative magnitudes of effectiveness of contract and trust in construction projects. The results highlight that complex contracts are more effective in moderating the asset specificity-strong form opportunistic behavior link, whereas complex contracts and trust are both effective in curbing weak form opportunistic behavior. Therefore, this research sheds new light on how transaction characteristics require appropriate governance mechanisms to minimize dangers in construction projects. This research also offers important implications for managers who participate in construction projects. First, Chinese owners can benefit from this paper by realizing that contractors are likely to behave opportunistically in both strong and weak form. As well as breaching formal agreements, contractors can also earn their own profits by violating the spirit of mutual agreement. Interviews with some project managers and contract managers indicated that they focused more on violation of contracts. However, this paper shows that asset specificity has a more positive effect on weak form opportunistic behavior. Therefore, in line with the goal of safeguarding

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transactions, managers should be cautious of weak form opportunistic behavior at the same time. Second, when owners have invested in transaction-specific assets, they can be prepared for partners’ self-serving behavior through devising proper formal or informal safeguards. Because formal contracts turned out to be more effective in safeguarding transactions against contractors’ strong form opportunistic behavior arising from asset specificity, owners should pay special attention to this safeguard. Meanwhile, the findings indicate that both complex contracts and high level of trust are effective in mitigating weak form opportunistic behavior. As well as designing complex contracts, it is worthwhile for owners and contractors to develop trust. Trust can be accumulated, for example, by information exchange or the sharing of benefits. Finally, international construction companies could also obtain help from the results of this research when they cooperate with Chinese partners. Limitations and Directions for Future Research This paper has several limitations that provide directions for future research. First, this paper only created a survey and acquired data from owners to eliminate social desirability bias of self-reports (Jap and Anderson 2003). However, contractors should be invited to participate in future surveys and collecting data from both owners and contractors would be an interesting task for future research. Second, both contractual complexity and trust are multidimensional constructs (Lumineau 2017; Schepker et al. 2014) and this study viewed them from an overall perspective. Future nuanced research could focus on how parties’ behaviors change under each dimension of contractual complexity and trust. Third, this research has examined which governance mechanism is more effective for two forms of opportunistic behavior resulting from asset specificity and discussed optimum range of application. However, the relationship between the governance mechanisms and their joint effect are not clear. For this reason, future research should explore whether contract and trust substitute or complement each other when safeguarding owners against contractors’ strong form or weak form opportunistic behavior. Fourth, power asymmetry exists in the relationships of owners and contractors (Chang and Qian 2015). However, power asymmetry, resulting from size difference, corporate ownership, contract clauses, or construction progress, may influence contractors’ cooperative and opportunistic behavior and what roles governance mechanisms play in this context. Therefore, it is interesting to find appropriate governance mechanisms when power asymmetry influences contractors’ behavior. Fifth, all respondents in this research are from China; however, national culture may influence contract design and trust building (Cao et al. 2018). Therefore, for future research, it would be interesting to explore the relationship between asset specificity and contractors’ opportunistic behavior under different cultural contexts and to investigate governance mechanisms between international collaborators. In particular, guanxi, as a cultural phenomenon in China, is really critical for interorganizational cooperation (Luo et al. 2012). Future study could examine how guanxi influences the asset specificityopportunistic behavior link and how Chinese guanxi affects governance mechanisms through trust.

Acknowledgments The authors would like to acknowledge the National Natural Science Foundation of China (NSFC) for its financial support for this research (Grants No. 71231006 and 71572124). In addition, the authors thank all the interviewees and respondents who participated in the survey. © ASCE

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