Collusion governance strategies under the construction supervision system in China

Abstract The construction supervision system plays an essential role in promoting the development of Chinese construction industry. However, as the core of the supervision system, the supervisor may deviate from duty and collude with the contractor to seek more profits. This paper investigates optimal collusion governance strategies under the prevailing supervision system. This paper develops a game-theoretic framework including an owner, a supervisor and a contractor, wherein all players interact and pursue to maximize their self-profits. The collusion equilibrium and the collusion-proof equilibrium are explored. Since the game contains multiple rounds of strategic interactions, backward induction is applied to ensure subgame perfection. The results show that collusion makes the supervision system not always in the owner’s interests. For projects recommended to implement the supervision system, the boundary condition for the owner applying the supervision system is derived. For projects required mandatory supervision, the owner prefers to let the contractor and supervisor collude under certain conditions and guard against collusive behaviours otherwise. This study contributes to the theory by exploring the effects of covert collusion and optimal governance strategies. In addition, this study can assist the owner in better understanding and managing agent collusion to safeguard the project quality.