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The Efficiency of Incomplete Contracts: An Empirical Analysis of Air Force Engine Procurement


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  • Keith J. Crocker
  • Kenneth J. Reynolds
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    This article examines the incentives of contractual parties to design agreements that are left intentionally incomplete with regard to future duties or contingencies. More complete contracts mitigate ex post opportunism and the associated distortions in unobservable investment, but at the cost of additional resources expended in ex ante design. The optimal degree of contractual incompleteness involves a tradeoff between these opposing forces, the magnitudes of which may be predicted based on observable characteristics of the transactors and of the exchange environment. The resulting hypotheses are tested using panel data on the pricing procedures using in Air Force engine procurement contracts. We conclude that the degree of contractual completeness chosen in practice reflects a desire by the parties to minimize the economic costs associated with contractual exchange.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 24 (1993)
    Issue (Month): 1 (Spring)
    Pages: 126-146

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    Handle: RePEc:rje:randje:v:24:y:1993:i:spring:p:126-146

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    Cited by:
    1. Josh Lerner & Robert P. Merges, 1997. "The Control of Strategic Alliances: An Empirical Analysis of Biotechnology Collaborations," NBER Working Papers 6014, National Bureau of Economic Research, Inc.
    2. Sen Wang & Tim Bogle & G. Cornelis van Kooten, 2012. "Forestry and the New Institutional Economics," Working Papers, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group 2012-05, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
    3. Hideshi Itoh & Hodaka Morita, 2011. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," CESifo Working Paper Series, CESifo Group Munich 3533, CESifo Group Munich.
    4. William P. Rogerson, 1994. "Economic Incentives and the Defense Procurement Process," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(4), pages 65-90, Fall.
    5. Gian Luigi Albano & Federico Dini & Roberto Zampino, 2008. "Bidding for Complex Projects: Evidence From the Acquisitions of IT Services," Working Papers, Fondazione Eni Enrico Mattei 2008.86, Fondazione Eni Enrico Mattei.
    6. Kosnik, Lea-Rachel, 2014. "Determinants of contract completeness: An environmental regulatory application," International Review of Law and Economics, Elsevier, Elsevier, vol. 37(C), pages 198-208.
    7. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure
      [The Handbook of Organizational Economics]
      ," Introductory Chapters, Princeton University Press, Princeton University Press.
    8. William P. Rogerson, 1993. "Economic Incentives and the Defense Procurement Process," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1078, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. repec:hal:journl:halshs-00103116 is not listed on IDEAS
    10. Jean Beuve & St├ęphane Saussier, 2012. "Interfirm cooperation in strategic relationships: the role of formal contract," Industrial and Corporate Change, Oxford University Press, vol. 21(4), pages 811-836, August.
    11. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc.
    12. Thomas P. Lyon, 2000. "Competition and Technological Complexity in Procurement: An Empirical Study of Dual Sourcing," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0420, Econometric Society.


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