Contract Duration and the Costs of Market Transactions

Alexander MacKay

American Economic Journal: Microeconomics, 2022, vol. 14, issue 3, 164-212

Abstract: The optimal duration of a supply contract balances the costs of re-selecting a supplier against the costs of being matched to an inefficient supplier when the contract lasts too long. I develop a structural model of contract duration that captures this trade-off and provide an empirical strategy for quantifying (unobserved) transaction costs. I estimate the model using federal supply contracts for a standardized product, where suppliers are selected by procurement auctions. The estimated transaction costs are substantially greater than consumer switching costs and a significant portion of total buyer costs. Counterfactuals illustrate the importance of accounting for the duration margin.

JEL-codes: D22 D23 D44 D86 H57 L14 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1257/mic.20200128

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