Hybrid Contracting in Repeated Interactions

Bernhard Ganglmair (), Julian Klix () and Dongsoo Shin ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Many business relationships rely on loose arrangements and relational dynamics in early interactions, only to solidify their alliances through contractual committments later. Using a repeated-games framework with a finite horizon, we show how such a hybrid-contracting strategy can both extend the duration of a cooperative business relationship (intensive margin) and expand the set of environments in which cooperation can be achieved (extensive margin). We model the contractual commitment part of hybrid contracting as a smooth-landing contract that restricts the action space only in the backend of the relationship. Such a flexible contract outperforms more rigid contractual arrangements because it does not crowd out early-stage cooperation, thereby complementing relational dynamics. Our results are robust to extensions that account for variations in contract costs and timing, and we show that optimal contract length trades off profitability with implementability.

Keywords: contracts; hybrid contracting; incomplete contracts; relational contracts; repeated games; R&D; strategic alliances (search for similar items in EconPapers)
JEL-codes: C73 D86 L14 (search for similar items in EconPapers)
Pages: 46
Date: 2025-08
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
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