Costly Contracting in a Long-Term Relationship
AbstractWe examine a model of contracting where parties interact repeatedly and can contract at any point in time, but writing enforceable contracts is costly. A contract can describe contingencies and actions at a more or less detailed level, and the cost of writing a contract is proportional to the amount of detail. We consider both formal (externally enforced) and informal (self-enforcing) contracts. The presence of writing costs has important implications both for the optimal structure of formal contracts, particularly the tradeoff between contingent and spot contracts, and for the interaction between formal and informal contracting. Our model sheds light on these implications and generates a rich set of predictions about the determinants of the optimal mode of contracting.
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Bibliographic InfoPaper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 249.
Date of creation: 2003
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