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Long-term Relationships Governed by Short-term Contracts

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  • Crawford, Vincent P

Abstract

This paper studies the effects of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information, and contracts are complete, ex cept that short-term contracts specify only current-period actions. T hen, short-term contracting distorts investment decisions only when t he efficient plan involves mainly sunk-cost investment and the relati onship plays a consumption-smoothing role. There is a general, but no t universal, tendency to underinvest. Copyright 1988 by American Economic Association.

Suggested Citation

  • Crawford, Vincent P, 1988. "Long-term Relationships Governed by Short-term Contracts," American Economic Review, American Economic Association, vol. 78(3), pages 485-499, June.
  • Handle: RePEc:aea:aecrev:v:78:y:1988:i:3:p:485-99
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    Cited by:

    1. Zhu, Tian, 2000. "Holdups, simple contracts and information acquisition," Journal of Economic Behavior & Organization, Elsevier, vol. 42(4), pages 549-560, August.
    2. repec:bla:manchs:v:85:y:2017:i:3:p:295-319 is not listed on IDEAS
    3. Donni, Olivier, 2014. "Over-investment in marriage-specific capital," Mathematical Social Sciences, Elsevier, vol. 67(C), pages 34-43.
    4. Skaperdas, Stergios & Syropoulos, Constantinos, 1996. "Can the shadow of the future harm cooperation?," Journal of Economic Behavior & Organization, Elsevier, vol. 29(3), pages 355-372, May.
    5. de Meza, David & Lockwood, Ben, 2004. "Too Much Investment : A Problem Of Coordination Failure," The Warwick Economics Research Paper Series (TWERPS) 703, University of Warwick, Department of Economics.
    6. Macleod, W.B. & Malcomson, J.M., 1989. "Efficient Specific Investments, Incomplete Contracts, And The Role Of Market Alternatives," Papers 8946, Tilburg - Center for Economic Research.
    7. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 81-108.
    8. Darlene C. Chisholm, 1993. "Asset Specificity and Long-Term Contracts: The Case of the Motion-Pictures Industry," Eastern Economic Journal, Eastern Economic Association, vol. 19(2), pages 143-155, Spring.
    9. Marin, Dalia, 1990. "Tying in International Trade," Munich Reprints in Economics 3114, University of Munich, Department of Economics.
    10. Stefania Marcassa & Grégory Ponthière, 2010. "Until Death Do Us Part? The economics of short-term marriage contracts," Working Papers halshs-00564900, HAL.
    11. Laure Durand-Viel & Bertrand Villeneuve, 2016. "Strategic Capacity Investment under Hold-up Threats: The Role of Contract Length and Width," Manchester School, University of Manchester, vol. 84(3), pages 313-339, June.
    12. Hans K. Hvide & Eirik Gaard Kristiansen, 2012. "Management of Knowledge Workers," Journal of Law and Economics, University of Chicago Press, vol. 55(4), pages 815-838.
    13. Jonker N. & Grip A. de, 1999. "Do employees with Flexible Contracts receive less Training?," ROA Research Memorandum 001, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    14. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, vol. 95(5), pages 1369-1385, December.
    15. Didier Fouarge & Andries Grip & Wendy Smits & Robert Vries, 2012. "Flexible Contracts and Human Capital Investments," De Economist, Springer, vol. 160(2), pages 177-195, June.
    16. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133 Elsevier.
    17. Roumasset, J., 1995. "The nature of the agricultural firm," Journal of Economic Behavior & Organization, Elsevier, vol. 26(2), pages 161-177, March.
    18. Tribo Gine, José Antonio, 1997. "Long-term and short-term labor contracts versus long-term and short-term debt financial contracts," DEE - Working Papers. Business Economics. WB 7027, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    19. Bac, Mehmet, 2001. "To invest or screen efficiently: a potential conflict in relationships governed by incomplete contracts," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 567-588, March.
    20. Zylbersztajn, Decio & Lazzarini, Sergio G., 2005. "On the survival of contracts: assessing the stability of technology licensing agreements in the Brazilian seed industry," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 103-120, January.

    More about this item

    JEL classification:

    • D29 - Microeconomics - - Production and Organizations - - - Other
    • D3 - Microeconomics - - Distribution

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