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Long-Term Contracts and Short-Term Commitment: Price Determination for Heterogeneous Freight Transactions

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  • Scott E. Masten

Abstract

This paper considers a class of contracts in which parties write detailed, long-term performance obligations that leave one or both parties with broad discretion to terminate the agreement on short notice with little or no penalty. I argue that formal contracts may be valuable, even where trade involves little or no relationship-specific investment and termination is the only remedy, as a way of economizing on the cost of determining prices for a series of heterogeneous transactions. Evidence from a survey of truck drivers shows both the general structure of contracts between freight carriers and drivers and the manner in which hauls are priced to be consistent with the goal of economizing on renegotiation costs. Copyright 2009, Oxford University Press.

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  • Scott E. Masten, 2009. "Long-Term Contracts and Short-Term Commitment: Price Determination for Heterogeneous Freight Transactions," American Law and Economics Review, American Law and Economics Association, vol. 11(1), pages 79-111.
    • Handle: RePEc:oup:amlawe:v:11:y:2009:i:1:p:79-111
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    File URL: http://hdl.handle.net/10.1093/aler/ahp005
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    Citations

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    Cited by:

    1. Anjana Susarla, 2012. "Contractual Flexibility, Rent Seeking, and Renegotiation Design: An Empirical Analysis of Information Technology Outsourcing Contracts," Management Science, INFORMS, vol. 58(7), pages 1388-1407, July.
    2. Dubois, Pierre & Vukina, Tomislav, 2009. "Incentives to Invest in Short-term vs. Long-term Contracts: Evidence from a Natural Experiment," IDEI Working Papers 590, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2009.
    3. Scott, Alex, 2015. "The value of information sharing for truckload shippers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 81(C), pages 203-214.
    4. Brodrechtova, Yvonne, 2015. "Economic valuation of long-term timber contracts: Empirical evidence from Germany," Forest Policy and Economics, Elsevier, vol. 55(C), pages 1-9.
    5. 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.
    6. Giorgio Zanarone & Desmond (Ho-Fu) Lo & Tammy L. Madsen, 2016. "The double-edged effect of knowledge acquisition: How contracts safeguard pre-existing resources," Strategic Management Journal, Wiley Blackwell, vol. 37(10), pages 2104-2120, October.
    7. Maija Halonen-Akatwijuka & Oliver Hart, 2015. "Short-term, Long-term, and Continuing Contracts," NBER Working Papers 21005, National Bureau of Economic Research, Inc.
    8. Shang, Max Zongyuan & McEwan, Ken, 2017. "The Boundary of the Farm: Homegrown versus Purchased Feed on Ontario Swine Farms," Annual Meeting, 2017, June 18-21, Montreal, Canada 264191, Canadian Agricultural Economics Society.
    9. Jason Miller & Keith Skowronski & John Saldanha, 2022. "Asset ownership & incentives to undertake non‐contractible actions: The case of trucking," Journal of Supply Chain Management, Institute for Supply Management, vol. 58(1), pages 65-91, January.

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