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Contracting on Time

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  • Sergei Guriev

    ()
    (New Economic School/CEFIR and CEPR)

  • Dmitriy Kvasov

    ()
    (The University of Auckland)

Abstract

The paper shows how the time considerations, especially those concerning contract duration, affect incomplete contract theory. Time is not only a dimension along which the relationship unfolds but also a continuous verifiable variable that can be included in contracts. We consider a bilateral trade setting where contracting, investment, trade, and renegotiation take place in continuous time. We show that efficient investment can be induced either through a sequence of constantly renegotiated fixed-term contracts; or through a renegotiation-proof ‘evergreen’ contract–a perpetual contract that allows unilateral termination with advance notice. We provide a detailed analysis of properties of optimal contracts.

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Bibliographic Info

Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0059.

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Length: 32 pages
Date of creation: Feb 2005
Date of revision:
Publication status: Published in American Economic Review, December 2005
Handle: RePEc:cfr:cefirw:w0059

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References

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Citations

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Cited by:
  1. Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 91-16, Department of Economics at the University of Washington.
  2. Ngo Van Long & Antoine Soubeyran & Raphael Soubeyran, 2012. "Knowledge Accumulation within an Organization," Working Papers, LAMETA, Universtiy of Montpellier 12-03, LAMETA, Universtiy of Montpellier, revised Jan 2012.
  3. Bard Harstad, 2009. "The Dynamics of Climate Agreements," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1474, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Sergei Guriev & Mikhail Klimenko, 2010. "Duration and Term Structure of Trade Agreements," Working Papers w0150, Center for Economic and Financial Research (CEFIR).
  5. Alicia García-Herrera & Rafael Llorca-Vivero, 2010. "How time influences franchise contracts: the Spanish case," European Journal of Law and Economics, Springer, Springer, vol. 30(1), pages 1-16, August.
  6. Khovanskaya, Irina & Sonin, Konstantin & Yudkevich, Maria, 2008. "Budget Uncertainty and Faculty Contracts: A Dynamic Framework for Comparative Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6744, C.E.P.R. Discussion Papers.
  7. Yuri Biondi, 2009. "Capital budgeting under relational contracting: optimal ranking and duration criteria for schemes of concession, project-financing and public-private partnership," Post-Print hal-00442716, HAL.
  8. Matthew Ellman, 2006. "The optimal length of contracts with application to outsourcing," Economics Working Papers 965, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Ferdinando Colombo & Guido Merzoni, 2008. "For how long to tie your hands? Stable relationships in an unstable environment," Journal of Economics, Springer, Springer, vol. 95(2), pages 93-120, November.

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