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

Hideshi Itoh, Hodaka Morita

Research output: Contribution to journalArticle

2 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
Externally publishedYes

Fingerprint

Threat
Relational contracts
Fixed price
Hold-up problem
Specific investments
Driving force
Buyers
Seller
Surplus

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

Cite this

Formal contracts, relational contracts, and the threat-point effect. / Itoh, Hideshi; Morita, Hodaka.

In: American Economic Journal: Microeconomics, Vol. 7, No. 3, 2015, p. 318-346.

Research output: Contribution to journalArticle

@article{676649e4eddb4ce0a9a41e89698943bc,
title = "Formal contracts, relational contracts, and the threat-point effect",
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.",
author = "Hideshi Itoh and Hodaka Morita",
year = "2015",
doi = "10.1257/mic.20130111",
language = "English",
volume = "7",
pages = "318--346",
journal = "American Economic Journal: Microeconomics",
issn = "1945-7669",
publisher = "American Economic Association",
number = "3",

}

TY - JOUR

T1 - Formal contracts, relational contracts, and the threat-point effect

AU - Itoh, Hideshi

AU - Morita, Hodaka

PY - 2015

Y1 - 2015

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=84938094944&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84938094944&partnerID=8YFLogxK

U2 - 10.1257/mic.20130111

DO - 10.1257/mic.20130111

M3 - Article

AN - SCOPUS:84938094944

VL - 7

SP - 318

EP - 346

JO - American Economic Journal: Microeconomics

JF - American Economic Journal: Microeconomics

SN - 1945-7669

IS - 3

ER -