IDEAS home Printed from https://ideas.repec.org/a/bla/jemstr/v5y1996i4p473-496.html
   My bibliography  Save this article

Termination Clauses in Long‐Term Contracts

Author

Listed:
  • Arijit Sen

Abstract

Many long‐term contracts incorporate a termination clause. This paper argues that when agents have hidden information, such a clause has a beneficial incentive effect—it enables a principal to screen agents' private information at a lower cost. In a two‐period model, this paper characterizes the optimal long‐term contract with a termination clause, which specifies that the principal will switch agents in the second period when the first‐period cost is high. The analysis delineates how the optimality of this clause depends on the intertemporal cost correlation structure, on the limits to agents' liability, and on the principal's degree of commitment.

Suggested Citation

  • Arijit Sen, 1996. "Termination Clauses in Long‐Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 473-496, December.
    • Handle: RePEc:bla:jemstr:v:5:y:1996:i:4:p:473-496
    DOI: 10.1111/j.1430-9134.1996.00473.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1430-9134.1996.00473.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1430-9134.1996.00473.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-381, May.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-927, December.
    3. James J. Anton & Dennis A. Yao, 1987. "Second Sourcing and the Experience Curve: Price Competition in Defense Procurement," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 57-76, Spring.
    4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    5. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(4), pages 597-625.
    6. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    7. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel F. Garrett & Alessandro Pavan, 2012. "Managerial Turnover in a Changing World," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 879-925.
    2. Krasikov, Ilia & Lamba, Rohit, 2021. "A theory of dynamic contracting with financial constraints," Journal of Economic Theory, Elsevier, vol. 193(C).
    3. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    4. Ziesemer, Thomas, 2001. "Contract Prolongation In Innovation Production As A Principal-Agent Problem With Moral Hazard," Research Memorandum 036, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    2. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    3. Greg Hallman & Jay C. Hartzell, 1999. "Optimal Compensation Contracts with Pay-For-Performance and Termination Incentives," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-053, New York University, Leonard N. Stern School of Business-.
    4. Isabelle Brocas, 2005. "Multistage Contracting with Applications to R&D and Insurance Policies," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(2), pages 317-346, May.
    5. Wang, Cheng, 2011. "Termination of dynamic contracts in an equilibrium labor market model," Journal of Economic Theory, Elsevier, vol. 146(1), pages 74-110, January.
    6. W. Bentley MacLeod, 1992. "Les contrats auto-exécutoires et la théorie des institutions du marché du travail," L'Actualité Economique, Société Canadienne de Science Economique, vol. 68(3), pages 433-451.
    7. Pedro Ortín‐Ángel & Vicente Salas‐fumás, 1998. "Agency‐Theory and Internal‐Labor‐Market Explanations of Bonus Payments: Empirical Evidence from Spanish Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 573-613, December.
    8. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    9. Zhao, Rui R., 2006. "Renegotiation-proof contract in repeated agency," Journal of Economic Theory, Elsevier, vol. 131(1), pages 263-281, November.
    10. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    11. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    12. Alex Edmans & Xavier Gabaix, 2011. "Tractability in Incentive Contracting," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 2865-2894.
    13. Mayshar, Joram & Moav, Omer & Neeman, Zvika, 2017. "Geography, Transparency, and Institutions," American Political Science Review, Cambridge University Press, vol. 111(3), pages 622-636, August.
    14. Catherine Refait, 2005. "Soutien financier ou mise en faillite de l'entreprise? Comprendre la décision de la banque," Revue Finance Contrôle Stratégie, revues.org, vol. 8(1), pages 131-157, March.
    15. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
    16. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
    17. Lewis A. Kornhauser & W. Bentley MacLeod, 2012. "Contracts between Legal Persons [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    18. Gabaix, Xavier & Sannikov, Yuliy & Edmans, Alex & Sadzik, Tomasz, 2009. "Dynamic Incentive Accounts," CEPR Discussion Papers 7497, C.E.P.R. Discussion Papers.
    19. Helmut Bester & Johannes Münster, 2016. "Subjective evaluation versus public information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(4), pages 723-753, April.
    20. Benjamin M. Gramig & Richard D. Horan & Christopher A. Wolf, 2008. "Livestock Disease Indemnity Design When Moral Hazard Is Followed by Adverse Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 627-641.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jemstr:v:5:y:1996:i:4:p:473-496. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.kellogg.northwestern.edu/research/journals/JEMS/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.