Formal contracts, relational contracts, and the threat-point effect

Hideshi Itoh, Hodaka Morita

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

We investigate whether formal contracts can help in resolving the holdup problem by studying repeated transactions between a seller and a buyer. Contrary to previous findings, we demonstrate that a simple fixed-price contract based on product delivery is of value even when relation-specific investment is purely cooperative. Furthermore, we show that focusing our attention on fixed-price contracts as a form of formal contracts is without loss of generality. The key driving force is a possibility that the relation-specific investment decreases the surplus under no trade. This possibility, although very plausible, has been largely ignored in previous analyses of the holdup problem.

Original languageEnglish
Pages (from-to)318-346
Number of pages29
JournalAmerican Economic Journal: Microeconomics
Volume7
Issue number3
DOIs
Publication statusPublished - 2015 Jan 1
Externally publishedYes

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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