IDEAS home Printed from https://ideas.repec.org/a/oup/jleorg/v33y2017i1p105-138..html
   My bibliography  Save this article

Caveat Venditor: The Conditional Effect of Relationship-Specific Investment on Contractual Behavior

Author

Listed:
  • Peter Murrell
  • Radu A. Păun

Abstract

We examine the effect of relationship-specific investment on the use of detailed contracts using data on transactions from a survey of Romanian firms. In those transactions, seller relationship-specific investment increases the amount of contractual detail, while buyer relationship-specific investment decreases it. We interpret these results using a hostages model applied to cash-flow and credit constrained firms. Sellers are more likely to be vulnerable to hold up than buyers are, implying that seller losses from hold up (and consequently the incentive to use a more detailed contract) increase with seller investment and decrease with buyer investment. This leads to the asymmetric effects of buyer and seller relationship-specific investment. Asymmetry is present in empirical estimates using a variety of methods that counter bias due to the endogeneity of the specific-investment variables, but is not present in OLS estimates. The hostages model with cash-constrained firms predicts the differences between OLS and consistent estimates. (JEL D23, K12, L14, P3)

Suggested Citation

  • Peter Murrell & Radu A. Păun, 2017. "Caveat Venditor: The Conditional Effect of Relationship-Specific Investment on Contractual Behavior," Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(1), pages 105-138.
  • Handle: RePEc:oup:jleorg:v:33:y:2017:i:1:p:105-138.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/jleo/eww011
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • P3 - Economic Systems - - Socialist Institutions and Their Transitions

    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:oup:jleorg:v:33:y:2017:i:1:p:105-138.. 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: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: https://academic.oup.com/jleo .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.