TY  - JOUR
AU  - Chakravarty,Surajeet
AU  - MacLeod,W. Bentley
TI  - Contracting in the Shadow of the Law
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13960
PY  - 2008
Y2  - April 2008
UR  - http://www.nber.org/papers/w13960
L1  - http://www.nber.org/papers/w13960.pdf
N1  - Author contact info:
Surajeet Chakravarty
University of Exeter
E-Mail: s.chakravarty@exeter.ac.uk

W. Bentley MacLeod
Department of Economics
Columbia University
420 West 118th Street, MC 3308
New York, NY 10027
Tel: 310-571-5083
Fax: 212/854-4782
E-Mail: bentley.macleod@columbia.edu
AB  - Economic models of contract typically assume that courts enforce obligations based on verifiable events (corresponding to the legal rule of specific performance). As a matter of law, this is not the case. This leaves open the question of optimal contract design given the available remedies used by the courts. This paper shows that American standard form construction contracts can be viewed as an efficient mechanism for implementing building projects given existing legal rules. It is shown that a central feature of these contracts is the inclusion of governance covenants that shape the scope of authority, and regulate the ex post bargaining power of parties. Our model also implies that the legal remedies of mistake, impossibility and the doctrine limiting damages for unforeseen events developed in the case of Hadley vs. Baxendale are efficient solutions to the problem of implementing complex exchange.
ER  -