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The Value of Building Codes

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  • Peter F. Colwell
  • Abdullah Yavaş

Abstract

We present a double moral hazard model to study the impact of building codes on the safety/quality level chosen by the builder and the level of care expended by the buyer. We show that codes can be a mechanism to implement the first-best solution provided: (1) The code prescribes the optimum safety level, (2) The code uses the efficient technology to achieve the optimum safety level, and (3) The courts use Negligence Rule as the liability rule. We argue, however, that codes in general do not use the efficient technology. We provide an alternative mechanism to implement the first-best solution. This mechanism is a contract between the builder and the buyer that specifies the level of safety jquality to be expended by the builder. We prove that the contract is a more effective and more efficient mechanism than are the building codes. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Peter F. Colwell & Abdullah Yavaş, 1992. "The Value of Building Codes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 501-517.
  • Handle: RePEc:bla:reesec:v:20:y:1992:i:4:p:501-517
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    References listed on IDEAS

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    1. Sally M. Davies & Douglas A. McManus, 1991. "The effects of closure policies on bank risk-taking," Finance and Economics Discussion Series 158, Board of Governors of the Federal Reserve System (U.S.).
    2. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, pages 235-258.
    3. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40.
    4. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
    5. Davies, Sally M. & McManus, Douglas A., 1991. "The effects of closure policies on bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 917-938, September.
    6. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
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