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The Role of Installment Payments in Contracts for Services

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  • Tom K. Lee
  • I.P.L. Png

Abstract

This article studies the role of installment payments in relationships characterized by moral hazard and sunk costs. We rule out vertical integration and payments contingent on the product of the contractor. Instead, each payment is negotiated as and when made. In such circumstances, an initial (down) payment serves to redress the weakness of the contractor in ex post renegotiations. If higher effort by the contractor in the first stage increases the marginal product of effort in the second stage, a second installment payment induces the contractor to invest greater effort initially.

Suggested Citation

  • Tom K. Lee & I.P.L. Png, 1990. "The Role of Installment Payments in Contracts for Services," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 83-99, Spring.
    • Handle: RePEc:rje:randje:v:21:y:1990:i:spring:p:83-99
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    Cited by:

    1. D. J. Wu & Min Ding & Lorin M. Hitt, 2013. "IT Implementation Contract Design: Analytical and Experimental Investigation of IT Value, Learning, and Contract Structure," Information Systems Research, INFORMS, vol. 24(3), pages 787-801, September.
    2. Volodymyr Babich & Christopher S. Tang, 2012. "Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 301-314, April.

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