The role of performance-based contract against ex-post unobservability of housing quality

Abstract

This paper focuses on the principal's ex-post unobservablity of housing quality after the construction. If the principal expects that the agent takes an opportunistic action, she would not offer the contract in the first place. We analyzed the performance-based contract to solve this problem, and proved that with the framework of performance-based contract, the social optimal contract can be concluded between the principal and the agent. Furthermore, we clarified the effect of inspection accuracies on the efficiency and possibility of the contract agreement.