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.
| Original language | English |
|---|---|
| Pages (from-to) | 1369-1385 |
| Number of pages | 17 |
| Journal | American Economic Review |
| Volume | 95 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - 2005 Dec |
| Externally published | Yes |
ASJC Scopus subject areas
- Economics and Econometrics