Title: Contracting in the shadow of the law
First published: 2008
Description: "Economic models of contract typically assume that courts enforce obligations on the basis of verifiable events.  As a matter of law, this is not the case.  This leaves open the question of optimal contract design given the available remedies that are enforced by a court of law.  This paper shows that standard form construction contracts can be viewed as an optimal solution to this problem.  It is shown that a central feature of construction 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 provides a unified framework for the study of the legal remedies of mistake, impossibility and the doctrine limiting damages for unforeseen events developed in the case of Hadley vs.  Baxendale"--National Bureau of Economic Research web site.
LC classification: HB1