Long-term Relationships Governed by Short-term Contracts

Vincent Crawford

American Economic Review, 1988, vol. 78, issue 3, 485-99

Abstract: This paper studies the effects of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information, and contracts are complete, ex cept that short-term contracts specify only current-period actions. T hen, short-term contracting distorts investment decisions only when t he efficient plan involves mainly sunk-cost investment and the relati onship plays a consumption-smoothing role. There is a general, but no t universal, tendency to underinvest. Copyright 1988 by American Economic Association.

Date: 1988
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Working Paper: Long-Term Relationships Governed by Short-Term Contracts (1986)
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