Formal Contracts, Relational Contracts, and the Threat-Point Effect

Hideshi Itoh and Hodaka Morita ()

American Economic Journal: Microeconomics, 2015, vol. 7, issue 3, 318-46

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 (JEL C78, D23, D86)

JEL-codes: C78 D23 D86 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mic.20130111
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Citations: View citations in EconPapers (4)

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Working Paper: Formal Contracts, Relational Contracts, and the Threat-Point Effect (2011)
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