The transaction costs and the choice of contractual arrangements in the construction industry in Hong Kong

Abstract

This thesis follows a neo-institutional

economics approach to analyse the economic nature

of contractual arrangements in the Hong Kong

construction industry. It explains that

subcontracting can reduce transaction costs:

(1) using piece-rate contracts to replace time-wage

contracts to save the high costs of monitoring;

and

(2) using subcontractors as intermediaries to

perform tasks at a lower transaction cost due

to their comparative advantages in gathering

price information, specific knowledge and

resources.

The above assertions are evaluated in terms of

three refutable hypotheses using statistics

published by the Census and Statistics Department

of the Hong Kong SAR Government.

Hypothesis I: To be employed with short term

contracts is not preferred by the construction

workers than to be employed with long term contracts;

Hypothesis II: A subcontractor is not more

commonly used in construction works of higher values

than in those of lower values;

Hypothesis III: A subcontractor is not more

commonly used in construction works by ordinary

trades than in those by special trades.

In Table 1 summarizes the test results for each

hypothesis and states their wider theoretical

implications. The three hypotheses are all refuted.

The message is that subcontracting is neither an

inefficient contractual arrangement nor a means of

exploitation by the upstream contractors. It is

rather the result of the free choice of the

contracting parties, as a matter of constrained

maximization in a private property rights system,

seeking to reduce transaction costs.

Table 1. Summary of Tests Results for Hypotheses I, II and III

Hypotheses Regarding Subcontracting in

the Hong Kong Construction Industry Test Results Theoretical Implications Hypothesis I To be employed with short term contracts is not preferred by the construction workers than to be employed with long term contracts. Hypothesis refuted. The construction workers prefer being employed with piece-rate contracts or casual daily wage contracts. Hypothesis II A subcontractor is not more commonly used in construction works of higher values than in those of lower values. Hypothesis refuted. A subcontractor is more commonly used in construction works of higher values and by ordinary trades. Subcontracting is not a matter of random choice but for reducing transaction costs. Subcontracting decision would depend on the characteristics of the construction works. Hypothesis III A subcontractor is not more commonly used in construction works by ordinary trades than in those by special trades. Hypothesis refuted. A subcontractor is more commonly used in construction works of higher values and by ordinary trades. Subcontracting is not a matter of random choice but for reducing transaction costs. Subcontracting decision would depend on the characteristics of the construction works.