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Transparency, market operation and trust in the Dutch construction industry: an exploratory study
Johan Graafland a; Andre Nijhof b a Faculty of Philosophy, Tilburg University, The Netherlands b Faculty of Business, Public Administration and Technology, University of Twente, The Netherlands Online Publication Date: 01 February 2007

To cite this Article Graafland, Johan and Nijhof, Andre(2007)'Transparency, market operation and trust in the Dutch construction

industry: an exploratory study',Construction Management and Economics,25:2,195 205

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Construction Management and Economics (February 2007) 25, 195205

Transparency, market operation and trust in the Dutch construction industry: an exploratory study
JOHAN GRAAFLAND1* and ANDRE NIJHOF2
1 2

Faculty of Philosophy, Tilburg University, The Netherlands Faculty of Business, Public Administration and Technology, University of Twente, The Netherlands

Received 24 January 2006; accepted 30 May 2006

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After the discovery of illegal price agreements in the Dutch construction industry, the government and major players in the sector have initiated a transition process towards more professional commercial relations. In the transition process transparency plays an important part, as it is a precondition for better market operation in the construction sector. However, there are significant disadvantages to a pursuit of transparency, such as higher costs and the risk of information overload. It is therefore necessary to find a good balance between more transparency and other ways to restore trust between key players in the construction sector. Especially complex products with a high degree of risk can best be dealt with through implicit contracts, in which trust is based on a mixture of the reputation mechanism, contracts that create a congruity of interests and the integrity of the contract partners. Keywords: Transparency, market operation, trust, integrity, implicit contracts

Introduction
Transparency is a theme that makes the papers every day. Numerous interest groups, such as trade unions, consumer organizations, investors and environmental organizations demand information about, for example, the salaries of administrators and managing directors, the technical specifications of products and the environmental effects of the companies operations (Kaptein, 2003). In the Dutch construction industry, too, the necessity for more transparency is felt. After it had appeared in 2001 that illegal price agreements were being made between construction enterprises on a large scale, a breach of trust arose between clients and contractors (Graafland, 2004). In order to restore trust, the socalled Regieraad (Management Council) was formed by the government and the construction sector. According to the Regieraad (2005) transparency together with innovation and a good qualityprice ratio is one of the core elements in the transition process of the Dutch construction sector, because it contributes to

*Author for correspondence. E-mail: j.j.graafland@uvt.nl

creating trust between the various partners in a building process by making the actions verifiable. In standard neoclassical theory transparency is one of the conditions for good market operation (Graafland, 2006). However, less attention is paid to the notion that there are also limits to transparency, because communicating information is costly. In a dynamic and complex environment it is time consuming and often even impossible to collect, put into writing or otherwise communicate all the information that may be relevant for transaction partners. It is therefore inefficient to demand complete transparency. Hence, it is important that transparency is supplemented by other ways of realising the trust between market parties. The objective of this article is to investigate the need for more transparency in the Dutch construction sector, its limits and its relation to trust and market operation for the construction industry. The study was carried out in the context of an innovation programme: Process and System Innovation in the Construction Industry. The method of this study is based on a combination of conceptual analysis and interviews with the managers of various organizations in the industry. The contents of this paper are as follows. First, we describe the method and the sample of interviewees.

Construction Management and Economics ISSN 0144-6193 print/ISSN 1466-433X online # 2007 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/01446190600830631

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Table 1 Sample of respondents Type of organization Customers Number of interviewees and their positions 3 Directors 2 Managers Engineering firms 1 Director 2 Managers Building enterprises 4 Directors Suppliers of building enterprise 2 Directors

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Branch and investigation organizations 2 2 1 1 Directors Managers Secretary Journalist

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Next, we give a definition of transparency and reasons why more transparency in the Dutch construction industry is desirable. Fourth, we discuss the limits to transparency. The fifth section deals with additional ways to enhance the trust between contracting parties and an efficient market operation in the construction industry. We distinguish four models that indicate the direction for how trust can be restored in the construction industry. Next we present seven dilemmas that arise when putting transparency into practice. The last section summarizes the main conclusions.

any biases related to specific interests. We also included some managers from branch and research institutes in the construction sector, because they are less directly involved in business and particular business interests may distort their views less. The interviews were face to face, guided by a list of open questions, leaving space for explanatory questions and illustrations. The interviews were carried out in September and October of 2005. Table 1 presents information about the types of business of the respondents. The results of the interviews have been processed in the conceptual framework. This resulted in the final version of the report, upon which this paper is based.

Method What is transparency and why is it desirable?

A conceptual framework was developed of the relationship between transparency, trust and market operation. This was based upon literature on market operation, transaction costs, reputation, trust and the role of values and norms (Williamson, 1985; North, 1990; Kay, 1993; Browning and Zupan, 1996; Van de Klundert, 1999; Bovenberg, 2002; Klein Woolthuis, 1999; Graafland and Smid, 2004; Graafland, 2006). Next, we performed interviews among representatives of the Dutch construction sector. The objective of the interviews was to carry out a preliminary exploration of the perceptions that exist in the Dutch construction industry with regard to transparency, market operation and trust. Since it takes a lot of time to get the participation of high level managers and to arrange an interview, the sample size was limited to 20 interviews. This means that the research has an explorative character and does not give a full representative picture of the Dutch construction industry. KDO-advies, a consultancy bureau on sustainable development and the use of space for the Dutch construction sector, selected the managers to be interviewed. The criterion for selection was obtaining representatives from all major segments of the Dutch construction sector, ranging from customers to the suppliers of building companies. By selecting representatives from different segments, we sought to expose In this section we first define transparency. Next, we briefly discuss the background of the construction fraud. Then we shall consider the responses of interviewed managers to the question of the relative importance of more transparency in the transition processes in the construction industry. Finally, we go into the reasons why transparency is desirable. What is transparency? Transparency comes from Latin transparere which means to be translucent. A transparent organization allows insight into issues that are relevant for the parties involved (Kaptein, 2003). The parties involved (or stakeholders) comprise all sorts of groups that are influenced by the actions of the organization, such as suppliers, employees, clients, competitors, the government and the public in a wide sense. These parties need the insight provided by the organization for taking wellconsidered decisions and for being able to account for them to other parties. Transparency concerns the provision of information about all sorts of aspects of the transactions that the company enters into, such as the quality of the products that it trades, the guarantee conditions, etc. (Velasquez, 1998). The enterprise can still further reduce the

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Table 2 What is transparency?

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Customers and customer organization: Provide consumers insight in information they need for taking good decisions. Clarify who is responsible for what and on which moment. Being predictable. Providing a clear picture of the price and quality. Engineering firms: Making and complying to clear agreements. No information should be kept back for anyone. Provide information if this generates more insight. Provide clear insight into how offers of building companies are judged and selected. Building enterprises: Making clear how business partners are related to each other and what you expect from one another. Transparency is about openness, but not about complete disclosure. I understand transparency as being honest and open, not hiding any cards in your sleeve. Insight in division of tasks, responsibilities and division of risks. Suppliers: Making clear the considerations and dealings, which facilitates accountability to all parties involved. The way companies are selected must be clear and verifiable. Branch and investigation organizations: Provide the parties involved in the building process access to relevant information. Maximal communication and information, also about things that go wrong. Give a clear picture of all costs in the offer. It has to do with corporate responsibility and clarity. Everything you do is verifiable. Clarity and verifiability.

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uncertainty of the parties involved by also providing insight into the intention with which the company concludes a transaction or contract. Transparency then pertains to the goals that the enterprise aims at (Kaptein and Wempe, 2002). Table 2 shows the responses of the interviewees on the second question about the definition of transparency.1 Some definitions are very similar to the definition proposed by Kaptein (2003). Several other definitions stress a sub-element of transparency, such as transparency about task division, making clear agreements, insight into the selection of offers and insight into the costs and in how prices are built up. A third category of response does not give a definition but rather points at some consequent values resulting from transparency, such as being predictable, accountability and verifiability. Background of the call for transparency The call for transition in the Dutch construction industry has become more intense after construction fraud became known in 2001. Construction fraud is the Dutch term for all the illegal activities of building companies and clients that are aimed at reducing the market operation in the construction industry and so

reducing the risks, increasing profit or enhancing continuity (Priemus, 2002; Van Waarden, 2003; Graafland, 2004). This especially concerned the informal preliminary consultation prior to an official tender, which has been legally forbidden since 1998, in which the potential contractors together determine who is going to execute a certain order and for what price. After the construction fraud was revealed in a TV broadcast in 2001, the Dutch Parliament formed a committee to investigate the fraud. The committee formulated various propositions in its report. One of the measures that aim at restoring healthy competitive relations and the mutual trust between building companies and customers concerns the establishment of a Management Council (Regieraad) (see www.regieraadbouw.nl). The Management Council was tasked with initiating change in the construction sector so that the sector may become healthy, transparent and innovative. Transparency: a pillar of the transition process? The Management Council has made transparency one of the three pillars of the transition process in the construction industrytogether with innovation and a good qualityprice ratio. In the interviews we asked to

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what extent managers of various types of organizations in the construction industry share the opinion that transparency is a core element of the transition process. A majority of 13 interviewed persons considered increased transparency an important aspect of the transition process in the construction industry, but not the only one. Other elements that are considered necessary are more innovation, an entire cultural change in which parties respect each other more, competition on the basis of a good qualityprice ratio instead of only on the basis of lowest price and changes in processes and systems. Note the similarity of these responses with the view of the Management Council. This indicates that the goals that the Management Council has set may be widely shared in the Dutch construction sector. Four respondents considered transparency to be of minor importance. They mention enhancement of the efficiency, innovation, market operation, qualityprice ratio, process improvements, integrity, customer orientation, or a better image as the real issues. They doubt that transparency is applicable. If companies are completely transparent, their profits will decline. One should not overcharge building enterprises. They expect more from efficiency. If one company can reduce its costs by, for example, 20%, it will force others to change as well. Another respondent argued that transparency is too vague a concept. Three other respondents, however, considered transparency to be a top priority and essential for restoring the trust between the building enterprises and their stakeholders. In their opinion transparency forms the underlying condition for all other changes, such as improving market operation and innovation and a better image.
Table 3 Advantages of more transparencya Customers 1 2 Customer satisfaction Selection of the best offers in the market/More efficiency and competition Restoration of confidence between customer and builders Engineering firms More efficient building process Regaining the confidence between the government and the sector Higher quality Better accountability to politics Restoration of confidence/Saving of time and money Innovative power Peaceful mind Restoration of confidence in the construction sector/ Good reputation More innovation Financial profit and more healthy continuity of the building enterprises Building enterprises Suppliers of building enterprise

Graafland and Nijhof

Transparency, market operation and innovation In neoclassical economics transparency is indeed perceived as an important condition for more efficient market operation and innovation. First of all, one of the conditions for perfect market operation is that the market parties have complete information about the price, quality and quantity of the goods or services that they trade (Graafland, 2006). The market parties need this information to make optimal decisions with regard to the deployment of their scarce resources that maximize their utility. This will contribute to customer satisfaction (see Table 3). Second, transparency leads to an enhancement of market operation if it reduces trade barriers (Browning and Zupan, 1996). This actually is the main reason behind the call for transparency in the construction sector. Owing to the informal and illegal preliminary consultation and the secret price agreements, the building companies no longer operated as independent suppliers and were able to obtain a higher price than the price on competitive market terms and this was disadvantageous for the clients (Graafland, 2004). Transparency in the tendering procedures therefore increases efficiency and competition, as mentioned by the customers and engineering firms (see Table 3). Third, respondents from all segments of the construction sector mentioned restoring confidence (or creating a better image) as an advantage of more transparency (see Table 3). Information makes the actions of the company controllable and verifiable. By supplying accurate information about the product that will be delivered both prior to and during the execution of the transaction, the client is able to maintain an insight into whether expectations will actually be realized before making a payment. Trust can further

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Branch and investigation organizations Customer satisfaction

Restoration of confidence/ Better image

4 Other Improves public accountability/More confidence of citizens in government

Higher quality, less defects Higher returns/Reduction of costs/More sustainability

Note: aSome advantages were mentioned by several interviewees.

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increase if a transaction partner provides insight into its intentions (see above). It makes compliant, flexible cooperation between contract partners possible (Bovenberg, 2003). If parties do not trust each other and transparency of the parties performance is lacking, a transaction will only come about if additional provisions are made, which compensate for the lack of trust. However, as acknowledged by one manager of a building enterprise this practically always goes hand in hand with a rise in the transaction costs for both partners. This may even lead to a situation in which transactions do not come about at all: if information is incomplete and there is insufficient trust between market parties, they may not dare take the risk to conclude a transaction. As a result of this, the advantages that the transaction offers to both parties cannot be realized. Fourth, some managers of building enterprises and suppliers mentioned that transparency is of great importance for innovation. If transparency is missing, companies that perform well cannot distinguish themselves from companies that perform badly and the latter will be able to maintain their position in the market. Thus, the incentive for process and product innovation decreases. With transparent market relations companies that invest in process and product innovation in order to improve their qualityprice ratios can expect a greater market share, while companies that do not innovate will be pushed from the market in due course. The dynamics that result in this process cause the market to reorganize itself. Transparency is therefore an important condition for the working of market discipline as a stimulus for building enterprises to organize themselves more efficiently. A transparent enterprise will also, either internally or externally, provide information about matters that have gone wrong. This information offers the opportunity to
Table 4 Limits to transparencya Customers 1 Additional costs (audit groups, quality teams, etc.) Is very difficult or practically impossible Engineering firms Building enterprises Requires lot of paperwork Is practically impossible It benefits competitors Danger of more legal procedures Puts profit under pressure Suppliers of building enterprise

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adjust, learn (Zadek, 2001) and improve and raise the quality (Wartick and Wood, 1999). Where incidents are swept under the carpet, others get no opportunity to suggest improvements. Moreover, the stimulus to prevent problems in the future through innovation is less great (Punch, 1996). Finally, the respondents mentioned several other advantages. Customers (governmental organizations) are better able to give account of public expenditure to politicians, which will also contribute to the confidence of the citizens in their government; managers of building enterprises find more pleasure in their work; transparency will raise the profitability of a company (relative to non-transparent companies) and/or reduce its costs; transparency fosters more awareness of the advantages of energy-saving and environmental measures.

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Limits to transparency
Although transparency is an important condition for the good functioning of markets, there are also limits to offering transparency (see Table 4). First of all, as noted by a director of a customer organization, there can be substantial costs in communicating information (Conlisk, 1996). In a dynamic and complex environment it is time consuming to collect and put into writing or otherwise communicate all the information that may be relevant for the transaction partners. It is therefore important to provide that quantity of information where the benefits for the contract partners will outweigh the costs of collecting and communicating the information. Second, some respondents considered that complete transparency is practically impossible, because it is difficult to quantify the quality of projects. For

Branch and investigation organizations Bureaucratic costs

You cannot register all costs/ You cannot control everything Puts profit under pressure Perpetuates the status quo/Too many rules suffocate/The concept is too vague/Danger of more legal conflicts

3 Other

Note: aSome limitations were mentioned by several interviewees within one category.

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example, it is very difficult to quantify the aesthetic quality of a project and compare it with other aspects of the project. A third limit is that transparency must not disproportionately endanger the interests of the company that provides this information (Council for the Annual Reports, 2003). In a sector where many companies conceal information that is sensitive and harmful for them, to disclose the state of affairs may put profits under pressure and produce a disproportionate amount of damage to a company. The attitude of customers, too, influences how far a company can go with transparency. Clients who use confidential information about, for example, innovative techniques in order to inform the other competitors, deserve less transparency than customers who deal with the supplied information in a fair manner. Other limitations mentioned by the respondents is that the concept of transparency is too vague; that it perpetuates the status quo and diminishes innovations because of too many rules that prescribe transparency; that by demanding complete transparency the focus is more directed to legal safety and legal conflict; that transparency about customers criteria for selecting building companies can invoke legal action by nonselected companies. A final limitation to transparency (though this was not mentioned by one of the respondents) is that too much information may be counterproductive for some users. The objective of transparency is not to offer as much information as possible, but to give the information that is relevant and is beneficial for the insight of the users of the information. Because of the limited cognitive powers and restricted time for absorbing information, an overload of information may cause the user to overlook the most important information or even to refrain from inspecting the elements (Conlisk, 1996; Rabin, 1998). An example of this is the financial instruction leaflet for banking products that the Dutch Authority Financial Markets made obligatory for the provision of complex financial products such as mortgages, single premium assurance policies and investment funds. The instruction leaflet was intended to improve the insight into and the comparability of these products, to protect the financial consumer. An evaluation demonstrated, however, that the instruction leaflet is vague, too complex and hardly ever read. Only 7% of the consumers of a complex financial product had compared several instruction leaflets with each other and has benefited from this to any extent (NRC, 2004). Finally, we note that not all respondents mentioned disadvantages of more transparency. This particularly holds for the group of customers. This indicates that

Graafland and Nijhof

this group has the highest interest in an increase in transparency.

Transparency, reputation, integrity and innovative contracts

Because of the limitations to transparency, other ways are needed to restore the trust between market parties in the construction sector and improve the market operation. In this section we present three additional models besides the traditional model of more transparency in transactions. These are: improving the reputation mechanism, fostering integrity and the introduction of innovative cooperative contract forms (see Figure 1). In this section we describe each of these alternatives. This framework has been developed by combining some literature on perfect market operation (Browning and Zupan, 1996), transaction costs and implicit contracts (Williamson, 1985; North, 1990; Van de Klundert, 1999), reputation and the role of values and norms (Bovenberg, 2002; Graafland and Smid, 2004; Graafland, 2006), trust and mutual dependency (Klein Woolthuis, 1999) as well as current and emerging practices in the Dutch construction sector to which the interviewees referred. Transparency in transactions The demand for transparency often arises if the confidence in an enterprise or sector has been damaged. Offering more information in advance or during the transaction may then help to enhance the basis for trust and to further good market operation by making the actions of the company verifiable (arrow (1) in Figure 1). This model fits within the traditional way of doing business in the Dutch construction sector and aims to restore trust by increasing information flows and controls. If market parties inform each other properly about the transaction and the expectations they have of each other, both will have the confidence that the transaction is optimal for them in comparison with other alternatives that the market offers. For standard products where information about the transaction can relatively easily be obtained and the risks are small, one may opt for this model, in which transparency before and during the transaction is maximal and any remaining unforeseen aspects of the transaction are arranged by assigning liability in advance. In this case, the transaction partners trust the formal aspects of the contract and do not depend on whether the other contract partners are opportunistic or not. For improving market operation in line with this model, the transition policy in the construction sector

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Figure 1 Trust and market operation: four models

must focus on optimising the transparency of the information prior to making contracts and during their execution. Within this model more transparency means more insight into the award procedure, assessment matrices, price-fixing and claims for additional work. In some cases, however, information about all the elements of the contract cannot be supplied prior to or during the realization of a transaction. Furthermore the reduction of the uncertainties in advance via additional liability clauses may be too costly because not all the risks can be anticipated, and some aspects of the contract must be left open. As stressed by the new institutional economics (Williamson, 1985; North, 1990; Van de Klundert, 2005), writing down provisions to cope with all contingencies may generate many transaction costs varying from negotiations to legal procedures. In some cases, in order to conclude a transaction, both parties have to trust that each party will constructively cooperate if any unexpected circumstances arise. Macneil (1974, 1980) calls this a relational or implicit contract. We distinguish three different ways of building trust in implicit contracts. Transparency in past performances: reputation mechanism In the second model, the trust is based on a proper functioning of the reputation mechanism. In trade relations where the frequency of repeating bilateral contacts is high, the transaction partners will realize that an unfair treatment of the contract party will

strongly reduce the chance of successful cooperation in the future. The other market party will anticipate this and therefore, despite a lack of information about the transactions that are to be concluded, still take the chance of embarking with the company. However, also in non-repeating contacts, the reputation mechanism will prevent the abuse of the trading partner when information about the transaction is incomplete and only becomes known after the transaction has taken place. For other parties, too, will refrain from transactions with an opportunistic company if a bad performance becomes known on a wider scale (Bovenberg, 2002). Thus the other market party may assume that if the reputation mechanism is sufficiently effective, he will not need a full guarantee for a fair cooperation prior to embarking with the intended partner. In Figure 1 this approach is shown by arrow 2. If complete information before or during the transaction is impossible, parties will yet dare embark with each other if they trust that the reputation mechanism will make the other contract partners refrain from opportunist behaviour. The reputation mechanism only works properly if the performances from the past are transparent. To enhance transparency in the construction industry one may therefore not only focus on the transparency of performances prior to the making of the contract and during the execution of the project, but also on the transparency of similar performances of the enterprise in the past. If the Dutch construction sector wishes to make an effort towards the transition of the sector along

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this line, it should try to improve the availability of information about the past performances of companies. For this purpose, various instruments can be deployed. Examples are hallmarks, tracking systems, publications about best practices, black lists, arrangements that protect whistleblowers, satisfaction ratings and certificates such as various ISO standards (Rondinelli and Vastag, 2000). An example is the information system developed by ProRail, in which the past performance of contractors is recorded with a view to the selection of contractors in future projects (Nijhof and Rottier, 2005). Furthermore, as argued by Bovenberg (2002) and Graafland and Smid (2004), the reputation mechanism also requires that contract partners exhibit the virtue of prudence. That means, they should anticipate the influence of reputation on their business success and should not only be driven by short-term successes. As a good reputation only pays off in the long run, maintaining a good reputation will only be more important to the company if it has a long-term horizon. Integrity If information about past performance is lacking or companies have a short-term horizon, the reputation mechanism works insufficiently. Graafland and Smid (2004) and Graafland and Eijffinger (2004) demonstrate that the transparency that companies offer with regard to their past performances is in many cases too limited. If the conditions for a proper functioning of the reputation mechanism are not met, virtues such as integrity are of great importance for the trust required for concluding implicit contracts (Bovenberg, 2003; Nijhof and Rottier, 2005). Integrity means that the enterprise feels responsible for living up to its contracts. The motivation comes from within (NCW, 2001). Reliable companies refrain from cheating their contract partners, even if they expect this to be financially advantageous. They consider it a form of self-respect to observe explicit and implicit promises to the stakeholders. The stronger the moral commitment to observe implicit contracts, the less it is necessary to give insight at a more detailed level and to incur the costs involved with this higher level of transparency. In the second alternative model, model 3, the trust is based on the integrity of the contracting parties. In Figure 1 this is shown by arrow 3. Again, the contract does not specify all contingencies and therefore allows flexibility in searching for solutions instead of using rigid specifications, but one does not so much rely on the prudence of the contract partner (in combination with a proper functioning of the reputation mechanism) but on the integrity of the contract partner, so that any

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unexpected problems are solved reasonably and cooperatively. In order to promote the attitude of integrity, various instruments can be deployed. Examples are training in social and communication skills in the education of future managers and ethical training within the company (Graafland et al., 2003). Another instrument is a code of conduct. In the Netherlands this is encouraged by the Foundation Assessment Integrity Construction Industry (SBIB) (see www.sbib.nl). The SBIB supports the integrity policy of companies in the construction industry by advising about codes of conduct, making existing codes of conduct visible for third parties by a public register, monitoring compliance with the code of conduct and applying sanctions in case of shortcomings. Innovative contract forms A fourth means of enhancing trust between the parties is to stimulate the use of contracts that create congruity between the financial interests of both parties (arrow 4 in Figure 1). This is the case, for instance, in contract forms in which unforeseen windfalls or costs are shared by both transaction partners. The trust is then based on the mutual dependency between partners and the congruity of interests (Klein Woolthuis, 1999). In this situation, each partner knows that both parties are interested in keeping the costs of the project as low as possible. An example of this is the Waardse alliance for the construction of a train rail connection for transport of goods to Germany, the so-called Betuwelijn. The alliance is responsible for the design, environmental management and the management at the construction site. The parties in the alliance provide the budgets for design, supervision and risks together. Unexpected cost reductions are shared. Hence, there is a shared interest, in which all parties have an incentive to realize the best possible qualityprice ratio. Because of this shared interest the preparedness to help each other is great. Should any problems occur, the parties will cooperate and search for solutions in a constructive manner. This strengthens the trust and the mutual communication and leads to cost savings at the same time. The experiences with the alliance are positive. The progress of the project is not impeded by disagreements. Rigid specifications were not required, so that options for savings were kept open until the last moment. The Betuwelijn had considerably fewer budget overruns (Sicking, 2003). If model 4 is deployed, transparency must concentrate on themes such as the objectives and responsibilities of the parties involved, division of anticipated risks, focus on long-term costs and protection of

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innovative ideas. Instruments that raise transparency in these themes are primarily anchored in project consultation, audits and a cooperation culture at project level.

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A fourth dilemma pertains to the second model. On the one hand an enhancement of the reputation mechanism promotes market operation, because the market becomes more transparent. However, it may also impede market operation by creating additional entry barriers for newcomers who have not been able to build up a good reputation yet. Yet, this does not mean that the reputation mechanism does not work for newcomers. On the contrary, although other parties do not yet have information of past performance of newcomers on which they can base their expectations for future performances, they do know that the newcomers have a great interest in making a good impression in order to build up a good reputation: first impressions have a great influence on reputation. If the reputation mechanism functions properly, parties will therefore also dare to embark with newcomers. The fifth dilemma concerns a certain tension between the demand for more transparency and the demand for more integrity. If more transparency is motivated by distrust and takes place in a context of statutory forms of cooperation, this may lead to erosion of integrity and, on balance, to a decrease in trust. For if transparency is inspired by distrust and the need to board up all the aspects of the contract so that, if unexpected problems appear, the contract partner is liable, this assumes a lack of integrity. The risk is then that, subsequently, the implicit distrust also induces behaviour in which integrity does not play a part anymore. This is known as the crowding out of intrinsic motivations by extrinsic motivations (Frey and Oberholzer-Gee, 1997; Frey, 1998). On the other hand, it is also possible that transparency that is initially externally enforced will in the long term also lead to a change in culture and foster an intrinsic attitude of openness. If people use certain standards of transparency for a long time, they will get used to them and, provided that the standards are reasonable in terms of what they aim at, also develop their own motivation, which may survive when the externally enforced standards are removed. In other words, there may be a learning process for the parties. The last of the dilemmas concerns the relationship between transparency and innovation and a good qualityprice ratio. First, on the one hand, we have argued above that more transparency will provide a stimulus to innovation. However, an increase in transparency in the tendering procedure may also provide a disincentive if it reduces the protection of innovative ideas. Building companies must be able to rely on the assumption that a contribution of innovative ideas in the design stage is treated confidentially. This requires that in the procedure preceding the conclusion of the contract, innovative ideas are not communicated to competitors. An increase in transparency may

Dilemmas
Seeking the right balance between increasing transparency and alternative ways of restoring trust in the Dutch construction sector confronts us with a number of dilemmas. Below we give some seven dilemmas and point to ways of handling them. The first three dilemmas arise from the limits to transparency as explained above. Then we discuss two dilemmas that more specifically concern the enhancement of the reputation mechanism and integrity. The last two dilemmas relate to transparency in relation to the other two objectives of the Regieraad, innovation and high qualityprice ratio. The first dilemma arises from the fact that more transparency is costly. The development of instruments to enhance transparency may induce the development in which these instruments are extended more and more to overcome gaps. This involves the risk of high costs. For each enhancement of transparency, costs and benefits must therefore be weighed carefully. If the expected costs of measures fostering transparency exceed the expected benefits, one should abstain from them. A second dilemma is that offering more information can reduce the reliability, measurability, controllability or clarity of the information, as well as the preparedness of the interested parties to use the information. Hence, each increase in transparency must be weighed carefully against the loss in the quality of the information. One should not provide more information if this would reduce the total insight of the contracting parties in the transaction. A third dilemma is that more transparency may, on the one hand, increase the trust between contract partners, but, on the other hand, reduce the returns of the company that offers transparency if the other contract partners misuse the information supplied. Transparency can only lead to a restoration of good market relations if there is reciprocity between the various market parties. Where powerful parties within the sector effectively force other parties to give more information without themselves disclosing the state of their affairs, transparency may lead to a further imbalance of the market relations and cause the power of the strongest market party to further increase. Companies can therefore only be expected to increase transparency if their contract partners are also prepared to provide the information that these companies need.

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diminish the protection of intellectual property and, thus, provide a disincentive to innovation. Second, there is a dilemma between basing the selection of building companies on a good qualityprice ratio (instead of the lowest price) and transparency, because this in fact may lead to less transparency in the allocation process. The reason is that it is much more difficult to provide reliable and unambiguous information about the quality of a building plan than about its price. Each of these dilemmas plays a different part in the various market segments and context in the Dutch construction sector. Although we have offered some practical clues for how to handle these dilemmas, each situation demands a careful reflection of the potential opposite adverse effects. In practice, it will be important to aim at a good balance between the different types of solutions. A combination of elements of the above-mentioned four models may be optimal.
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Graafland and Nijhof

reduction in the incentive for innovation if the increase of transparency reduces the protection of intellectual property.

In the case of relatively standard products where information about the transactions can relatively easily be obtained, the transition policy may focus on a further improvement of the traditional explicit contracts, in which transparency in advance and during the transaction is maximal and any remaining unforeseen aspects of the transaction can be anticipated by allocating liability in advance. Complex products with a high degree of risk, in which anticipating uncertainties via additional liability clauses is too costly (because all contingencies cannot be foreseen) can best be dealt with through implicit contracts, in which the confidence is based on (a mixture of) the reputation mechanism, contracts that create a congruity of interests and the integrity of the contract partners.

Conclusions
Transparency means providing insight into matters that are relevant for the parties involved. Representatives from the various sections of the Dutch construction sector considered transparency as one of the preconditions for better market operation in the sector. The desirability of more transparency is inspired by its positive consequences: it raises the quality of the decisions of the parties in a transaction, improves the efficiency in building processes and the competition relations, enhances the trust, decreases transaction costs (resulting from legal procedures) and promotes innovation. In many cases, however, the respondents think that maximal transparency is not optimal. The advantages of transparency must be balanced against:

Acknowledgements
The authors would like to thank Henk van Tongeren, Vera Besseling, Oskar de Kuijer and other participants of the transparency table for their cooperation in the study report, upon which this paper is based, and PSIBouw for generously funding this research. They are also grateful to several referees for their valuable comments on an earlier version of this paper.

Notes
1. The total number of definitions reported in Table 2 is 18. In two interviews the respondents gave no definition.

N N N N N N

the costs of providing more information; reduction of reliability, measurability, verifiability or understandability of the information as well as of the preparedness to use the information; reduction of competition because of enhancement of entry barriers; the possibility of less profit for parties offering more transparency where there is a lack of reciprocity by the other parties; erosion of integrity if the demand for more transparency is motivated by distrust and takes place in the context of regulation of cooperation forms; limitation on the possibility to allocate on the basis of qualityprice ratio, because the quality of the building plan is hard to judge;

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