Relational Contracts and the Nature of Market Interactions
Martin Brown (),
Armin Falk and
Ernst Fehr ()
Econometrica, 2004, vol. 72, issue 3, 747-780
We provide evidence that long-term relationships between trading parties emerge endogenously in the absence of third party enforcement of contracts and are associated with a fundamental change in the nature of market interactions. Without third party enforcement, the vast majority of trades are initiated with private offers and the parties share the gains from trade equally. Low effort or bad quality is penalized by the termination of the relationship, wielding a powerful effect on contract enforcement. Successful long-term relations exhibit generous rent sharing and high effort (quality) from the very beginning of the relationship. In the absence of third-party enforcement, markets resemble a collection of bilateral trading islands rather than a competitive market. If contracts are third party enforceable, rent sharing and long-term relations are absent and the vast majority of trades are initiated with public offers. Most trades take place in one-shot transactions and the contracting parties are indifferent with regard to the identity of their trading partner. Copyright The Econometric Society 2004.
References: Add references at CitEc
Citations: View citations in EconPapers (210) Track citations by RSS feed
Downloads: (external link)
http://hdl.handle.net/10.1111/j.1468-0262.2004.00511.x link to full text (text/html)
Access to full text is restricted to subscribers.
Working Paper: Relational Contracts and the Nature of Market Interactions (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecm:emetrp:v:72:y:2004:i:3:p:747-780
Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues
Access Statistics for this article
Econometrica is currently edited by Daron Acemoglu
More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing ().