Contracting on Time

Guriev, SG and Kvasov, D (2005) Contracting on Time. American Economic Review, 95 (5). pp. 1369-1385. ISSN 0002-8282

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.

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Item Type: Article
Subject Areas: Economics
Date Deposited: 15 Oct 2024 09:50
Last Modified: 16 Oct 2024 00:51
URI: https://lbsresearch.london.edu/id/eprint/3910
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