On the Duration of Agreements

Milton Harris () and Bengt Holmstrom

International Economic Review, 1987, vol. 28, issue 2, 389-406

Abstract: A model of optimal contracts between two infinitely-lived parties, a borrower and lender, is presented and analyzed. The objective is to explain the phenomenon of finite-length, multi-period contracts. It is shown how costly information acquisition can account for multi- period contracts which are of bounded length. Comparative-statics results on how contract length responds to exogenous parameters, such as the cost of information acquisition, are also derived. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1987
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