Optimal Contract Design within Construction Industry using the Principal-Agent Theory

Agreements in construction contracts between client and contractor always depend upon uncertainty. Asymmetric Information and contrasting interests give rise to conflicts between the involved parties; in many cases to be settled before the court. The article illustrates the contractual agreement from the viewpoint of the Principal-Agent Theory, which within the framework of the New Institutional Economics aims to develop optimal risk sharing and economic efficiency of contracts. Basics of Moral Hazard and decision theory are presented to show the application of the Principal-Agent Theory within an example. Therefore optimal contracts are achievable, if the contractor's motivation is guided appropriately by means of compensation.