The Interaction of Implicit and Explicit Contracts in Construction and Procurement Contracting

Kenneth Corts

The Journal of Law, Economics, and Organization, 2012, vol. 28, issue 3, 550-568

Abstract: Recent empirical work on construction and procurement contracting finds that repeated interaction leads toward use of lower powered explicit contracts (e.g., cost-plus contracts instead of fixed-price [FP] contracts). I present a theoretical model of construction and procurement contracting that captures the trade-off between the flexibility of cost-plus contracts and the high-powered incentives of FP contracts. I then analyze the effect of implicit contracting supported by repeated interaction on explicit contract choice to demonstrate a rigorous intuition for this empirical finding. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Date: 2012
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