Essays on contracting in the construction industry

Writing contracts is expensive. Due to this cost, agents often leave contracts incomplete. The cost of writing contracts increase as complexity of the transactions increase. Complexity and cost of contracting affects the type of contracts and also the contractual relationship. Incompleteness in the contract also leads to inefficiencies in the trade and increases the role of law. In the first essay, I discuss and analyze contractual relationship in the construction industry. I look at the legal rules that are prevalent in the industry and show that the most legal rules used are efficiency based. I discuss contract formation, liquidated damages, material breach, and remedies and find that all these doctrines used are such that the total trade surplus is maximized. Though most doctrines are based on the economic efficiency principle there are a few rules that are based on fairness. In the second essay, I study risk and uncertainty in contracts. Contractual relationships are often fraught with uncertainties. And how do modeling uncertainty rather than risk change results? This question is answered by analyzing three different contracting situations. While in case of contracts for bilateral trade there is no difference between risk and uncertainty, if the contracts are written for joint ownership then having uncertain agents may result in no renegotiation but with risk averse agents there always renegotiation. Lastly a possibility of no trade is shown if agents are uncertain. In the last essay, I analyze how complexity affects contracting. Complexity is an important issue in contracting and this is evident in the construction industry. Large number of contracts ends up in disputes and as a result the damages imposed by the courts play an important role in the effort made by the agents. The optimal damage rule is characterized. Expectation damage is optimal, but if the contractor has all the bargaining power reliance damages does better.