Stakeholder Awareness in Sustainable Construction
Post on 23-Mar-2016
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Stakeholder Awareness in Sustainable ConstructionGunther Maier, Sabine Sedlacek
Introduction
Motivation: Previous work on the role of Green Building Councils as
third party governance institutions (presented at ERES in Milano, published in Energy Policy)
Main argument: developer and investor are potentially locked in a prisoners’ dilemma over the quality of a building. This hampers the construction of good quality buildings.
Underlying reason for this situation: imperfect information about the quality of a building.
Main result: Green Building Certificates can help overcome this blockage.
Introduction
Motivation: The situation between the developer and the investor
that we viewed as a two party game, can also be viewed as a principal agent situation: The investor (principal) wants to own a good quality
building The quality of the building is determined by the developer
(agent) Can the investor compensate the developer in such a way
that a good quality building will be built? Aren’t there numerous other such relationships in real
estate development? – What does the literature say?
Introduction
Motivation: What role does / can the green building movement play
in this relationship? Can it be a mediator in principal-agent-situations
throughout real estate development (like in our simple case)?
First results: Very little can be found in the literature
Web of Knowledge: Most hits not relevant
Search terms # of hits“Real estate development” 790“Real estate development” + “agent” 36“Real estate development” + “agency” 30“Real estate development” + “moral hazard” 3“Real estate development” + “adverse selection” 4
Introduction
Correct title: Principal-agent problems in real estate
development Questions:
Why isn’t real estate development viewed more from an agency theoretic perspective?
Can agency theory provide insights into the processes of real estate development?
Can green building institutions mediate in principal agent problems in real estate development?
Is there a potential research agenda?
Structure
Introduction The principal agent problem Real estate development Where are potential agency problems –
examples The role of green building institutions Conclusions
The principal agent problem
The principal agent problem is a problem of imperfect, asymmetric information
The effort of the agent influences the utility of the principal
The effort of the agent cannot (perfectly) be observed by the principal because of random influences
The effort is a dis-utility to the agent
The agent will try to maximize his own utility
The principal agent problem
Incentive problem: How can the principal design a compensation system which motivates the agent to act in the principal‘s interest (i.e. input sufficient effort so that the principal’s utility is maximized)?
Moral Hazard issues: “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.” (Krugman, 2009)
The principal agent problem
Adverse selection issue: When a market mechanism selects the “bad” business partners (and de-selects the “good” ones). E.g. in insurance: individuals with high risk (e.g.
smokers) buy health insurance, individuals with low risk do not higher costs for insurance company increased premium increased adverse selection.
Can the insurer differentiate prices between groups? issues of discrimination, racism, sexism, etc. in case of imperfect correlation between observable characteristics and risk.
Principal agent literature
Eisenhardt (1989) distinguishes between1. Positivist agency theory2. Principal agent research
Positivist agency theory: Identifies situations where principal and agent may
have conflicting interests Main focus: Owners and managers of large public
corporations Interested “why certain contractual relations arise”
(Jensen, 1983)
Principal agent literature
Principal agent research Concerned with a “general theory of principal agent
relationships” Mathematically oriented, microeconomic foundation Optimal contracts under specific constellations
(information, risk aversion)
Real estate development
Stages Stage 1: Inception of an idea
Stage 2: Refinement of the idea
Stage 3: Feasibility
Stage 4: Contract
negotiation
Stage 5: Formal
commitment
Stage 6: Construction
Stage 7: Completio
n and formal
opening
Stage 8: Property,
Asset, and Portfolio
Management
Developer
Real estate development
Roles of the developer Developer – Public: Planner, promoter,
negotiator, provider Developer – Capital
markets: Promoter, negotiator,
borrower, investment partner Developer – development
team: Employer, client, manager
Developer – user: Analyst, creator, promoter,
provider
Devel-oper
Public
User
The develop
ment team
Capital markets
Real estate development
The development team
DeveloperGeneral Contractor
Architect Builder
Engineers
Investors Banks
Marketing
Appraisers Sub-contractors
ProfessionalsRE Agents
Real estate development
The Real Estate Development Process ……is a sequence of steps from idea of the project to
the physical construction (Stage1-8)…not linear…increased specialization due to greater
complexity especially in sustainable buildingssize of the development team has expandedroles of some professionals have changedhigher complexity has generated the need for
better educated / more experienced professionals
Real estate development
Diverse stakeholder groups Interconnected interdependent structures Requires effective information exchange Clear communication ( Cole 2011: improved
cooperation, dialogue, partnering, inclusion, public involvement)
Can such a network work when different interests and stakes are involved?
Potential agency problems
Incentive problems: Throughout the value added chain of real estate
development: Developer – General contractor – Builder – Professionals –
sub-contractors Profit sharing, risk sharing Fixed price contract, input (cost) based contract,
performance based contract Firms – workers
Implementing the agreed qualities Avoiding accidents, damage, liabilities – insurance
Potential agency problems
Incentive problems: Throughout the value added chain of real estate
development: Developer – Architect
Costs vs. reputation – type of contract Architect – Builder & Professionals
Form vs. costs of implementation Developer – Marketing
Costs vs. form (marketability) Marketing – Real Estate Agents
Effort in sales activities
Potential agency problems
Moral hazard issues: Estimated vs. settled costs / early vs. late phase of the
development process downward biased cost estimates to “get the job” or to
get the project approved / upward biased settled costs for higher profit Developer – Investor Developer – General Contractor General Contractor – Builder, Professionals, Engineers, Sub-
contractors
Potential agency problems
Moral hazard issues: Appraisal
Marketing, Developer, Investor may push for biased appraisal (depending on interests)
External appraisers may consent for the benefit of future business
Potential agency problems
Adverse selection issues: Fixed price or lowest price sub-contracting generates
adverse selection problems Selection of sub-contractors who are economically
weak (“need the cash”) or willing to use illegal procedures (black labor, tax evasion, excessive risk, etc.)
Sub-contracting and special purpose corporations may be used to hide or isolate this issue.
The role of green building institutions
Green building certificates establish an additional overall quality standard for a development project Specify quality indicators Push for more coordination between the actors –
integrated planning Green building certificates add additional actors
Auditors, Consultants, Certifying institution Additional possibilities for agency problems
Green building certificates add complexity to the development project Additional possibilities for agency problems
Conclusion
Theoretical analysis: The structure of real estate development allows for
numerous relations that may be subject to agency problems due to incomplete and asymmetric information.
Anecdotal evidence suggests that these problems are of relevance
It makes sense to research real estate development projects, agents, and contracts from an agency perspective. How are specific relations organized in general? Focus on development projects with severe problems.
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