On the Efficiency of Standard Contracts the Case of Construction

Surajeet Chakravarty and W. Bentley Macleod
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Surajeet Chakravarty: University of Exeter

No 874, Working Papers from Princeton University, Department of Economics, Industrial Relations Section.

Abstract: Most contracts that individuals enter into are not written from scratch but depend upon forms and terms that have been successful in the past. In this paper we study the structure of the form construction contracts published by the American Institute of Architects (AIA). We show that these contracts are an efficient solution to the problem of procuring large, complex projects when unforeseen contingencies are inevitable. This is achieved by carefully structuring the ex post bargaining game between the Principal and the Agent. The optimal mechanism corresponding to the AIA construction form is consistent with decisions of the courts in several prominent, but controversial, cases, and hence provides an economic foundation for a number of the common-law excuses from performance. Finally, the case of form contracts for construction is an example of how markets, as opposed to private negotiation, can be used to determine efficient contract terms.

Keywords: construction contracts; structuring; bargaining; efficient solutions (search for similar items in EconPapers)
JEL-codes: N37 N4 N40 (search for similar items in EconPapers)
Date: 2004-09
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Citations: View citations in EconPapers (4)

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