Advanced Search
MyIDEAS: Login

Caveat venditor: The conditional effect of relationship-specific investment on contractual behavior

Contents:

Author Info

  • Peter Murrell

    (Department of Economics, University of Maryland)

  • Radu Paun

    ()
    (Competition Council, Romania)

Abstract

We offer a new perspective on the effect of relationship-specific investment on contract complexity, which has broad implications because complex contracts and vertical integration are substitutes. A simple model using transaction cost economics (TCE) predicts that buyer and seller relationship-specific investments have opposite effects on contract complexity. The model also predicts the signs of biases in OLS estimates of the effect of relationship-specific investments: unobserved heterogeneity causes downward bias in the estimated difference between the effects of buyer and seller specific investment, reducing the probability of finding opposite effects. We examine these predictions using data on agreements made by Romanian firms. When accounting for unobserved heterogeneity, seller relationship-specific investment has a positive effect on contract complexity while buyer investment has a negative effect. OLS estimates do not generate this result. The unique contribution of the paper is in simultaneously implementing TCE empirically, countering the problem of unobserved heterogeneity, generating estimates of the effects of specific investment that have opposite signs on opposite sides of the agreement, and explaining patterns of bias in the OLS estimates. Additionally, regional variation in court quality affects the complexity of contracts, suggesting that even moderate amounts of legal reform can have appreciable effects.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1157033
Our checks indicate that this address may not be valid because: 503 Service Unavailable. If this is indeed the case, please notify (Peter Murrell)
File Function: Main text
Download Restriction: no

Bibliographic Info

Paper provided by University of Maryland, Department of Economics in its series Electronic Working Papers with number 08-001.

as in new window
Length: 48 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:umd:umdeco:08-001

Contact details of provider:
Postal: Department of Economics, University of Maryland, Tydings Hall, College Park, MD 20742
Web page: http://www.econ.umd.edu/

Order Information:
Postal: Ms. Elizabeth Martinez, Department of Economics, University of Maryland, Tydings Hall, College Park, MD 20742
Email:

Related research

Keywords: transaction cost economics; TCE; contract; contract complexity; property-rights theory; relationship-specific investment; legal system; transition; Romania;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:umd:umdeco:08-001. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Murrell).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.