Economic Incentives and Psychological Empowerment in Construction Contracting: Complementing or Undermining

In construction contracting, economic incentives have been used to engender performance. However, the effect was found to be limited or even negative. The inconsistent findings on the value of using incentives to drive performance suggest the need to delve into their motivational mechanisms. However, few studies have explored the psychological pathways underpinning construction incentivization. To address this gap, this study draws on motivation crowding theory and tests two key propositions: (1) reciprocity-based economic incentives that signal trust or stimulate locus of control complement psychological empowerment, and (2) strategic economic incentives that signal disapproval and undermine psychological empowerment. Data from construction professionals in Hong Kong are analyzed using structural equation modeling. The findings show that reciprocity-based economic incentives that are perceived as fair enhance psychological empowerment by fostering trust and locus of control, resulting in improved project performance. In contrast, strategic penalties, which signal disapproval, undermine psychological empowerment. Notably, the undermining effect is less pronounced than the complementing effect in the construction contracting context, which contrasts with findings from nonmonetary contexts where undermining effects are typically dominant. This study advances the understanding of how economic incentives affect project performance by integrating insights from social psychology and signaling theory. Practically, penalty/reward incentives follow the dual pathways of incentivization and can be tailored as reciprocity-based or strategic in accord with project needs, while risk/reward-sharing incentives appear not to engage the same psychological mechanisms.