American Economic Review Vol. 95 No. 5 2005
Contracting on Time
Abstract
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.
- DOI
- 10.1257/000282805775014452
- Volume
- 95
- Issue
- 5
- Pages
- 1369-1385
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref