Asset Specificity, Long-Term Contracts, and the Good Faith Requirement

Donald Vandegrift ()

Eastern Economic Journal, 1998, vol. 24, issue 4, 475-493

Abstract: This paper analyzes the effect of court intervention on the choice between contracts and vertical integration when a specialized investment is required for least-cost production. It shows that: 1) differences in subjective probability estimates of the future bargaining power may cause the parties to contract when they should integrate and vice versa; 2) court intervention in the form of the good faith requirement improves efficiency by reducing the degree to which a shift in bargaining power allows a contractor to take a larger share of the gains to the contract and by compensating for differences in expected bargaining power; and 3) as the average difference between the buyer's and seller's estimates of future bargaining power increase, the net benefits of the good faith requirement rise.

Keywords: Contracts; Vertical Integration (search for similar items in EconPapers)
JEL-codes: L14 L22 (search for similar items in EconPapers)
Date: 1998
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://web.holycross.edu/RePEc/eej/Archive/eeconj/Volume24/V24N4P475_493.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eej:eeconj:v:24:y:1998:i:4:p:475-493

Access Statistics for this article

Eastern Economic Journal is currently edited by Cynthia A. Bansak, St. Lawrence University and Allan A. Zebedee, Clarkson University

More articles in Eastern Economic Journal from Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Victor Matheson, College of the Holy Cross ().