Bilateral Relationships Governed by Incomplete Contracts
AbstractThis paper explores implications of interactions between concontractibility of quality, multidimensional hidden information, switching costs and the frequency of trade on the terms of contracts in a buyer-seller setup. Optimal contractual arrangements are showm to consist of a sequence of two contracts with nondecreasing prices and nonincreasing quality and volume of exchange. In the absence of switching costs, an increase in the frequency of trade is absorbed by the first contract. For high frequencies of trade, switching costs may enhance welfare by improving the efficiency of screening through a better allocation of time between contracts.
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Bibliographic InfoArticle provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.
Volume (Year): 153 (1997)
Issue (Month): 2 (June)
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Web page: http://www.mohr.de/jite
Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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- Bac, Mehmet, 2001. "To invest or screen efficiently: a potential conflict in relationships governed by incomplete contracts," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 567-588, March.
- Bac, Mehmet & Saglam, Ismail, 1999. "Managerial defections, promotion criteria and firm growth," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 917-940, October.
- Bac, Mehmet, 2000. "On-the-Job Specific Training and Efficient Screening," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 681-701, October.
- Mehmet Bac, 2009. "An economic rationale for firing whistleblowers," European Journal of Law and Economics, Springer, vol. 27(3), pages 233-256, June.
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