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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. Donni, Olivier, 2014. "Over-investment in marriage-specific capital," Mathematical Social Sciences, Elsevier, vol. 67(C), pages 34-43.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Marin, Dalia, 1990. "Tying in International Trade," Munich Reprints in Economics 3114, University of Munich, Department of Economics.
    9. 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.
    10. 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).
    11. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, pages 1369-1385.
    12. Didier Fouarge & Andries Grip & Wendy Smits & Robert Vries, 2012. "Flexible Contracts and Human Capital Investments," De Economist, Springer, pages 177-195.
    13. 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.
    14. La Croix, Sumner J. & Grandy, Christopher, 1993. "Financial Integration in Antebellum America: Strengthening Bodenhorn's Results," The Journal of Economic History, Cambridge University Press, vol. 53(03), pages 653-658, September.
    15. 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.
    16. Roumasset, J., 1995. "The nature of the agricultural firm," Journal of Economic Behavior & Organization, Elsevier, vol. 26(2), pages 161-177, March.
    17. 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.
    18. 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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