Performance-based Contract for Aseismic Retrofit of Wooden Buildings

This paper focuses on aseismic retrofit contracts in the principal-agent problem with ex-post unobservability in terms of the quality of the agent´s work. The principal who asks for an aseismic retrofit cannot easily observe the quality of the agent´s work. This ex-post unobservability can lead the agent to take opportunistic action. Hence, the principal who predicts that the agent´s work will be negligent would not ask for the retrofit contract in the first place. A performance-based contract, which is proposed here, includes two-staged inspections via third parties. The first inspection is conducted to ascertain whether the design drawing for the aseismic retrofit has the potential to satisfy the principal´s performance requirement, and the other is carried out to check whether the retrofit is undertaken in accordance with the design drawing. This paper shows that an efficient contract can be concluded when the inspection accuracy is adequate.