The Value of Building Codes

We present a double moral hazard model to study the impact of building codes on the safety/quality level chosen by the builder and the level of care expended by the buyer. We show that codes can be a mechanism to implement the first-best solution provided: (1) The code prescribes the optimum safety level, (2) The code uses the efficient technology to achieve the optimum safety level, and (3) The courts use Negligence Rule as the liability rule. We argue, however, that codes in general do not use the efficient technology. We provide an alternative mechanism to implement the first-best solution. This mechanism is a contract between the builder and the buyer that specifies the level of safety jquality to be expended by the builder. We prove that the contract is a more effective and more efficient mechanism than are the building codes. Copyright American Real Estate and Urban Economics Association.