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Ex Post (In) Efficient Negotiation and Breakdown of Trade

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  • Rajkamal Iyer
  • Antoinette Schoar

Abstract

This paper examines frictions in contract renegotiation and its implications for allocative efficiency of contracts. Using a novel audit study methodology, we find that contracting parties in general are reluctant to engage in hold up. However, many efficient renegotiations of contracts also do not happen for the fear of being seen as extracting surplus. We also find that ex ante contracts are structured to mitigate losses arising from breach risk rather than hold up. The results also highlight that role of norms of fairness and reputation concerns in sustaining transactions in settings where contracts are primarily incomplete.

Suggested Citation

  • Rajkamal Iyer & Antoinette Schoar, 2015. "Ex Post (In) Efficient Negotiation and Breakdown of Trade," American Economic Review, American Economic Association, vol. 105(5), pages 291-294, May.
    • Handle: RePEc:aea:aecrev:v:105:y:2015:i:5:p:291-94
    Note: DOI: 10.1257/aer.p20151077
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 1-48.
    2. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
    3. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    4. Abhijit V. Banerjee & Esther Duflo, 2000. "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 989-1017.
    5. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    6. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May.
    7. Botond Köszegi, 2014. "Behavioral Contract Theory," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 1075-1118, December.
    8. Fabian Herweg & Klaus Schmidt, 2012. "Loss Aversion and Ex Post Inefficient Renegotiation," CESifo Working Paper Series 4031, CESifo.
    9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    10. Oliver Hart, 2009. "Hold-up, Asset Ownership, and Reference Points," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 267-300.
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    Cited by:

    1. Boken, Johannes & Gadenne, Lucie & Nandi, Tushar & Santamaria. Marta, 2022. "Community Networks and Trade," The Warwick Economics Research Paper Series (TWERPS) 1442, University of Warwick, Department of Economics.
    2. Maija Halonen-Akatwijuka & Oliver Hart, 2020. "Continuing Contracts [“Firms’ Use of Outside Contractors: Theory and Evidence,”]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 36(2), pages 284-313.
    3. Vivek Bhattacharya, 2021. "An Empirical Model of R&D Procurement Contests: An Analysis of the DOD SBIR Program," Econometrica, Econometric Society, vol. 89(5), pages 2189-2224, September.
    4. Francesco D'Acunto & Jin Xie & Jiaquan Yao, 2020. "Trust and Contracts: Empirical Evidence," CESifo Working Paper Series 8714, CESifo.

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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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