Contracting on Time

Sergei Guriev and Dmitriy Kvasov
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Dmitriy Kvasov: University of Adelaide

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Abstract: The paper shows how time considerations, especially those concerning contract duration, affect incomplete contract theory. Time is not only a dimension along which the relationship unfolds, but also a continuous verifiable variable that can be included in contracts. We consider a bilateral trade setting where contracting, investment, trade, and renegotiation take place in continuous time. We show that efficient investment can be induced either through a sequence of constantly renegotiated fixed-term contracts; or through a renegotiation-proof "evergreen" contract—a perpetual contract that allows unilateral termination with advance notice. We provide a detailed analysis of properties of optimal contracts.

Date: 2005-12
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03459064
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Published in American Economic Review, 2005, 5 (5), pp.1369 - 1385. ⟨10.1257/000282805775014452⟩

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Related works:
Journal Article: Contracting on Time (2005)
Working Paper: Contracting on Time (2005)
Working Paper: Contracting on Time (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03459064

DOI: 10.1257/000282805775014452

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