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Long-term Relationships Governed by Short-term Contracts

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Crawford, Vincent P

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Abstract

This paper studies the effects of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information, and contracts are complete, ex cept that short-term contracts specify only current-period actions. T hen, short-term contracting distorts investment decisions only when t he efficient plan involves mainly sunk-cost investment and the relati onship plays a consumption-smoothing role. There is a general, but no t universal, tendency to underinvest. Copyright 1988 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 3 (June)
Pages: 485-99
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Handle: RePEc:aea:aecrev:v:78:y:1988:i:3:p:485-99

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  1. de Meza, David & Lockwood, Ben, 2004. "Too Much Investment : A Problem Of Coordination Failure," The Warwick Economics Research Paper Series (TWERPS) 703, University of Warwick, Department of Economics. [Downloadable!]
  2. Darlene C. Chisholm, 1993. "Asset Specificity and Long-Term Contracts: The Case of the Motion-Pictures Industry," Eastern Economic Journal, Eastern Economic Association, vol. 19(2), pages 143-155, Spring. [Downloadable!]
  3. Jonker,N. & Grip,A.,de, 1999. "Do employees with Flexible Contracts receive less Training?," Research Memoranda 001, Maastricht : ROA, Research Centre for Education and the Labour Market. [Downloadable!]
  4. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," Working Papers w0059, Center for Economic and Financial Research (CEFIR). [Downloadable!]
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