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

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.