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Contracting on Time

  • Sergei Guriev
  • Dmitriy Kvasov

The paper shows how 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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282805775014452
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 5 (December)
Pages: 1369-1385

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:5:p:1369-1385
Note: DOI: 10.1257/000282805775014452
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