University of Exeter
NBER Working Papers and Publications
|April 2008||Contracting in the Shadow of the Law|
with W. Bentley MacLeod: w13960
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 devel...
Published: Surajeet Chakravarty & W. Bentley MacLeod, 2009.
"Contracting in the shadow of the law,"
RAND Journal of Economics,
RAND Corporation, vol. 40(3), pages 533-557.
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