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Contracting on Time

Listed author(s):
  • Sergei Guriev
  • Dmitriy Kvasov

    (University of Adelaide)

The paper shows how 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.

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File URL: http://spire.sciencespo.fr/hdl:/2441/4et5cqo2b89lursqp7n50mt26c/resources/guriev-kvasov-amer-econ-review.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/4et5cqo2b89lursqp7n50mt26c.

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Date of creation: Dec 2005
Publication status: Published in American Economic Review, 2005, vol. 5, pp.1369-1385
Handle: RePEc:spo:wpmain:info:hdl:2441/4et5cqo2b89lursqp7n50mt26c
Contact details of provider: Web page: http://www.sciencespo.fr/

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