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Formal Contracts, Relational Contracts, and the Threat-Point Effect

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  • Hideshi Itoh
  • Hodaka Morita

Abstract

We investigate whether formal contracts can help in resolving the holdup problem by studying repeated transactions between a seller and a buyer. Contrary to previous findings, we demonstrate that a simple fixed-price contract based on product delivery is of value even when relation-specific investment is purely cooperative. Furthermore, we show that focusing our attention on fixed-price contracts as a form of formal contracts is without loss of generality. The key driving force is a possibility that the relation-specific investment decreases the surplus under no trade. This possibility, although very plausible, has been largely ignored in previous analyses of the holdup problem (JEL C78, D23, D86)

Suggested Citation

  • Hideshi Itoh & Hodaka Morita, 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 318-346, August.
  • Handle: RePEc:aea:aejmic:v:7:y:2015:i:3:p:318-46
    Note: DOI: 10.1257/mic.20130111
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    Cited by:

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    2. Chen, Zhiqi & Wang, Xiaoqiao, 2017. "Specific investment and supplier vulnerability," Economics Letters, Elsevier, vol. 151(C), pages 16-18.
    3. Alessandro De Chiara, 2018. "Courts' Decisions, Cooperative Investments, and Incomplete Contracts," CEU Working Papers 2018_5, Department of Economics, Central European University.
    4. Lømo, Teis Lunde & Ulsaker, Simen Aardal, 2016. "Promotional allowances," Working Papers in Economics 08/16, University of Bergen, Department of Economics.
    5. Hideshi Itoh, 2023. "What do contracts do to facilitate relationships?," The Japanese Economic Review, Springer, vol. 74(3), pages 333-354, July.
    6. Agamirova, Maria Е. (Агамирова, Мария) & Dzagurova, Nataliya B. (Дзагурова, Наталия), 2016. "The Legality of Vertical Restraints by the Rule of Reason and the Character of the Specific Investments [Правомерность Вертикальных Ограничивающих Соглашений С Позиции "Взвешенного Подхода&quo," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 122-137, December.

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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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