On the Efficiency of Standard Form Contracts: The Case of Construction

40 Pages Posted: 2 Sep 2004

See all articles by Surajeet Chakravarty

Surajeet Chakravarty

University of Exeter Business School

W. Bentley MacLeod

Princeton University; National Bureau of Economic Research (NBER); Columbia University - Department of Economics; IZA Institute of Labor Economics

Date Written: August 2004

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.

JEL Classification: D8, K2, L7

Suggested Citation

Chakravarty, Surajeet and MacLeod, William Bentley, On the Efficiency of Standard Form Contracts: The Case of Construction (August 2004). Available at SSRN: https://ssrn.com/abstract=586217 or http://dx.doi.org/10.2139/ssrn.586217

Surajeet Chakravarty

University of Exeter Business School ( email )

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Exeter, EX4 4JH
United Kingdom

National Bureau of Economic Research (NBER)

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Columbia University - Department of Economics ( email )

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IZA Institute of Labor Economics ( email )

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Germany

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