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Asset Specificity, Long-Term Contracts, and the Good Faith Requirement

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  • Donald Vandegrift

    (College of New Jersey)

Abstract

This paper analyzes the effect of court intervention on the choice between contracts and vertical integration when a specialized investment is required for least-cost production. It shows that: 1) differences in subjective probability estimates of the future bargaining power may cause the parties to contract when they should integrate and vice versa; 2) court intervention in the form of the good faith requirement improves efficiency by reducing the degree to which a shift in bargaining power allows a contractor to take a larger share of the gains to the contract and by compensating for differences in expected bargaining power; and 3) as the average difference between the buyer's and seller's estimates of future bargaining power increase, the net benefits of the good faith requirement rise.

Suggested Citation

  • Donald Vandegrift, 1998. "Asset Specificity, Long-Term Contracts, and the Good Faith Requirement," Eastern Economic Journal, Eastern Economic Association, vol. 24(4), pages 475-493, Fall.
  • Handle: RePEc:eej:eeconj:v:24:y:1998:i:4:p:475-493
    as

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    File URL: http://web.holycross.edu/RePEc/eej/Archive/eeconj/Volume24/V24N4P475_493.pdf
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    References listed on IDEAS

    as
    1. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
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    3. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    5. Alpha C. Chiang & Stephen M. Miller, 1988. "Inflation Expectations, Wealth Perception, and Consumption Expenditure," Eastern Economic Journal, Eastern Economic Association, vol. 14(1), pages 27-38, Jan-Mar.
    6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    7. Seater, John J, 1982. "Are Future Taxes Discounted?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 376-389, August.
    8. Preston J. Miller & Thomas J. Sargent, 1984. "A reply to Darby," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    9. Tanner, J Ernest, 1970. "Empirical Evidence on the Short-Run Real Balance Effect in Canada," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 473-485, November.
    10. Buchanan, James M, 1976. "Barro on the Ricardian Equivalence Theorem," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 337-342, April.
    11. Thomas M. Supel & Richard M. Todd, 1984. "Should currency be priced like cars?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    12. Seater, John J. & Mariano, Roberto S., 1985. "New tests of the life cycle and tax discounting hypotheses," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 195-215, March.
    13. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-336, April.
    14. Kochin, Levis A, 1974. "Are Future Taxes Anticipated by Consumers? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 385-394, August.
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    More about this item

    Keywords

    Contracts; Vertical Integration;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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