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

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