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Contracting Costs, Inflation, and Relative Price Variability

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  • Reagan, Patricia
  • Stulz, Rene M

Abstract

This paper provides an analysis of the effect of relative price uncertainty and price level uncertainty on contracting costs. The paper shows that, as relative price uncertainty or price level uncertainty increase, contracts where performance is assured through the posting of a bond become more advantageous than contracts that rely on reputation. Increases in relative price and price level uncertainty make contracting more expensive by increasing the payoff from defaulting on long-term contracts when unfavorable realizations occur. As uncertainty increases, long-term contracting becomes less frequent and reputation plays a smaller role in contracting. Copyright 1993 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 25 (1993)
Issue (Month): 3 (August)
Pages: 585-601

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Handle: RePEc:mcb:jmoncb:v:25:y:1993:i:3:p:585-601

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Ewing, Bradley T. & Seyfried, William L, 2003. "Modeling The Philips Curve: A Time-Varying Volatility Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(2).
  2. Mariano Tommasi, 1993. "High Inflation: Resource Misallocations and Growth Effects," UCLA Economics Working Papers 704, UCLA Department of Economics.

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