Partnership in a Dynamic Production System

Erica L. Plambeck and Terry A. Taylor
Additional contact information
Erica L. Plambeck: Stanford U
Terry A. Taylor: Columbia U

Research Papers from Stanford University, Graduate School of Business

Abstract: This paper considers two firms that engage in joint production. The prospect of repeated interaction introduces dynamics in that actions that firms take today influence the costliness and effectiveness of actions in the future. Repeated interaction also facilitates the use of informal agreements (relational contracts) that are sustained not by the court system, but by the ongoing value of the relationship. We characterize the optimal relational contract in this dynamic system with double moral hazard. We show that an optimal relational contract has a simple form that does not depend on the past history. The optimal relational contract may require that the firms terminate their relationship with positive probability following poor performance. This may occur even when the firms observe an independent signal for the action of each firm that allows them to assign blame. If, however, the buyer's action does not influence the dynamics, the need for termination is eliminated. The paper applies the method to the issue of sequential versus parallel collaborative product development.

Date: 2004-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://gsbapps.stanford.edu/researchpapers/library/RP1892.pdf
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to gsbapps.stanford.edu:443 (certificate verify failed) (http://gsbapps.stanford.edu/researchpapers/library/RP1892.pdf [302 Found]--> https://gsbapps.stanford.edu/researchpapers/library/RP1892.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:ecl:stabus:1892

Access Statistics for this paper

More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by ().