Green Building and the Organization of Development

In this paper we investigate the organizational architecture of development firms. We use the special case of green building which we expect to raise both the uncertainty of direct development costs and payoffs as well as the bargaining costs of development to investigate if and how firms change their firm's structure or contracts to accommodate green building. Previous empirical and theoretical work on the homebuilding industry tends to focus on the size of firms (for example, Somerville 1999; Helsely and Strange 1997). Our focus is more closely related to Eccles (1981) who argues that general contractors and their subcontractors constitute a quasifirms that are not quite fully integrated nor completely market based. We build a model development firm contracting. The model allows us to estimate comparative statics results related to changes in development cost uncertainty and in bargaining costs. We then use evidence from a new survey conducted in the first quarter of 2010 to investigate the predictions of our model. The survey was sent to developers likely to engage in green building, and we obtained 102 useable responses, a 10% response rate. Survey questions focus on firm experience with their first and subsequent green projects. The respondents are mostly privately-held firms well-distributed across the U.S. and engaged in the development of single family, multifamily, office, retail and industrial real estate