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Contracting on Time

Author

Listed:
  • Sergei Guriev

    (New Economic School/CEFIR and CEPR)

  • Dmitriy Kvasov

    (The University of Auckland)

Abstract

The paper shows how the time considerations, especially those concerning contract duration, affect incomplete contract theory. Time is not only a dimension along which the relationship unfolds but also a continuous verifiable variable that can be included in contracts. We consider a bilateral trade setting where contracting, investment, trade, and renegotiation take place in continuous time. We show that efficient investment can be induced either through a sequence of constantly renegotiated fixed-term contracts; or through a renegotiation-proof ‘evergreen’ contract–a perpetual contract that allows unilateral termination with advance notice. We provide a detailed analysis of properties of optimal contracts.

Suggested Citation

  • Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," Working Papers w0059, Center for Economic and Financial Research (CEFIR).
  • Handle: RePEc:cfr:cefirw:w0059
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    References listed on IDEAS

    as
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    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

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