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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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    Abstract

    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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    Web page: http://www.rje.org

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    Cited by:
    1. William P. Rogerson, 1993. "Economic Incentives and the Defense Procurement Process," Discussion Papers 1078, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Hideshi Itoh & Hodaka Morita, 2011. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," CESifo Working Paper Series 3533, CESifo Group Munich.
    3. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc.
    4. Timothy F. Bresnahan & Jonathan D. Levin, 2012. "Vertical Integration and Market Structure," NBER Working Papers 17889, National Bureau of Economic Research, Inc.
    5. Thomas P. Lyon, 2000. "Competition and Technological Complexity in Procurement: An Empirical Study of Dual Sourcing," Econometric Society World Congress 2000 Contributed Papers 0420, Econometric Society.
    6. Luc Baumstark & Claude Ménard & William Roy & Anne Yvrande-Billon, 2005. "Modes de gestion et efficience des opérateurs dans le secteur des transports urbains de personnes," Post-Print halshs-00103116, HAL.
    7. 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.
    8. Gian Luigi Albano & Federico Dini & Roberto Zampino, 2008. "Bidding for Complex Projects: Evidence From the Acquisitions of IT Services," Working Papers 2008.86, Fondazione Eni Enrico Mattei.

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