Losing Under Contract: Transaction-Cost Externalities and Spot Market Disintegration
Standard economic intuition of revealed preference implies that when two parties freely enter into a contract then neither should be worse off. In this study, we develop a simple model showing that introducing the opportunity to contract can lower welfare for some, and perhaps all, contracting parties. We consider a situation where processors can obtain inputs from suppliers (farmers) using either a spot market or contractual arrangements, and where spot market transaction costs depends on the volume of trade in the spot market. We show that contracting parties may lose when more contracting results in higher transaction costs for spot market participants. At the margin, firms and input suppliers gain from signing contracts. However, contracting raises spot-market transaction costs for those who do not sign contracts, which provides a greater incentive for others to sign contracts, ultimately inducing more contracting than optimal. The model demonstrates why structural or organizational change may be rapid and why the private minimization of transaction costs may not lead to optimal institutional arrangements.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 3 (2005)
Issue (Month): 2 (April)
Pages: 1-19
| Handle: | RePEc:bpj:bjafio:v:3:y:2005:i:2:n:2 |
| Contact details of provider: | Web page: https://www.degruyter.com
|
| Order Information: | Web: https://www.degruyter.com/view/j/jafio |
No references listed on IDEAS
You can help add them by filling out this form.
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.
When requesting a correction, please mention this item's handle: RePEc:bpj:bjafio:v:3:y:2005:i:2:n:2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.