American Economic Review Vol. 78 No. 3 1988
Long-Term Relationships Governed by Short-Term Contracts
Abstract
This paper studies the effect of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information, and contracts are complete, except that short-term contracts specify only current-period actions. Then, short-term contracting distorts investment decisions only when the efficient plan involves mainly sunk-cost investment and the relationship plays a consumption-smoothing role. There is a general, but not universal, tendency to underinvest.
- Volume
- 78
- Issue
- 3
- Pages
- 485-499
- Sources
- bibtex:phds-export.bib