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

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  • Kenneth S. Corts

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.

Suggested Citation

  • Kenneth S. Corts, 2012. "The Interaction of Implicit and Explicit Contracts in Construction and Procurement Contracting," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(3), pages 550-568, August.
    • Handle: RePEc:oup:jleorg:v:28:y:2012:i:3:p:550-568
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    File URL: http://hdl.handle.net/10.1093/jleo/ewr023
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    Cited by:

    1. Francisco Brahm & Jorge Tarzijan, 2016. "Relational Contracts and Collaboration in the Supply Chain: Impact of Expected Future Business Volume on the Make-or-Buy Decision," Journal of Supply Chain Management, Institute for Supply Management, vol. 52(3), pages 48-67, July.
    2. Nadia Fiorino & Emma Galli & Ilde Rizzo & Marco Valente, 2023. "Public procurement and reputation. An agent‐based model," Metroeconomica, Wiley Blackwell, vol. 74(4), pages 806-832, November.
    3. De Chiara, Alessandro, 2020. "Precontractual investment and modes of procurement," European Economic Review, Elsevier, vol. 124(C).
    4. Calogero Guccio & Domenico Lisi & Ilde Rizzo, 2019. "When the purchasing officer looks the other way: on the waste effects of debauched local environment in public works execution," Economics of Governance, Springer, vol. 20(3), pages 205-236, September.
    5. Anjana Susarla & Martin Holzhacker & Ranjani Krishnan, 2020. "Calculative Trust and Interfirm Contracts," Management Science, INFORMS, vol. 66(11), pages 5465-5484, November.
    6. Guccio, Calogero & Pignataro, Giacomo & Rizzo, Ilde, 2014. "Do local governments do it better? Analysis of time performance in the execution of public works," European Journal of Political Economy, Elsevier, vol. 34(C), pages 237-252.

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